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Ruh-roh. Rackspace brings Morgan Stanley aboard to evaluate its options

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As Amazon(s amzn), Google(s goog) and Microsoft(s msft) traded cloud price cuts in the past few months, you really had to wonder how Rackspace(s rax), with its high-touch (and pricier) service model, could compete. All of those companies dwarf Rackspace in size and resources. Now it’s clear Rackspace is wondering too and has hired Morgan Stanley to help chart its course.

The news, which comes just days after the San Antonio, Texas company reported better-than-expected first quarter earnings, was outlined in an 8K filing with the SEC on Thursday and first reported by Bloomberg News.

In an e-mailed statement, a Rackspace spokesman said:

“Our board decided to hire Morgan Stanley to evaluate the inbound strategic proposals, and to explore any other alternatives which could advance Rackspace’s long-term strategy. No decision has been made and there can be no assurance that the Board’s review process will result in any partnership or transaction being entered into or consummated. The company has not set a timetable for completion of this process and does not intend to discuss or disclose further developments with respect to this process unless and until the Board approves a specific partnership or transaction.

There’s been a series of management changes at the top as of late. Taylor Rhodes (pictured above) was named president in January, filling a slot that had been empty since Lew Moorman left for family reasons last summer. Former CEO Lanham Napier retired in February. So we’ll have to stay tuned and ask Rhodes about the company’s plans when he’s on stage at Structure next month.

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19 Responses to “Ruh-roh. Rackspace brings Morgan Stanley aboard to evaluate its options”

  1. openstackrules

    OpenStack was never the issue with Rackspace. The issue that plagued RackSpace from the get go was the execs, chief engineers, scientists, rackers, everyone at Rackspace is so full of themselves and it comes across as such during business discussions.

    Here is a company that believes it’s better than everyone else yet offers the same services at higher costs. Let’s see, I’m a CIO w/P&L responsibility and I first have to hear how great Rackspace is and then I have to pay more and get less.

    One particular chief sw engineer is a complete pompous a hole and quite frankly, I will be pleased when he and all the other pompous jerks lose their jobs.

    Because if it’s one thing that Cisco, Oracle, Redhat has, is smarter engineers and they won’t put up with the pompous dallas attitude of low level rackers.

  2. jhesr

    The more I think about it, Cisco seems like the one that needs this acquisition the most. Its obvious that the Cisco/EMC alliance is in trouble with Vmware buying Niciria and then Cisco buying whiptail. It looks to me like they are ready to go to war with each other in the next few years.

    If that happens Cisco is really going to want to find a way to replace Vmware in their stack. OpenStack would be a perfect way to leap frog the whole virtualization/hypervisor race and take it to the next level. Cloud computing is the next level of abstraction after the hyper visor. So it would make perfect sense for Cisco to jump on this Rackspace acquisition.

    From what I understand Cisco Webex already runs on OpenStack. So they already have familiarity with the pros and cons of the software. With the recent announcement that Cisco would spend $1 billion to get into the cloud game, what better way to spend that money than to put it towards buying one of the few companies left that can catapult any buyer into being a serious cloud competitor.

  3. Ruh-roh! I saw this bizarre “studies found that adding ruh-roh in front of a headline will get more clicks” headline, and you won’t believe what happened next!

    I barfed. That’s what happened next.

  4. Jason McKenzie

    The biggest problem with AWS, Azure etc. is they lock you in forever. Once you have moved your workload over, good luck getting it out.

    • i know those vendors would claim this is not true, Werner Vogels was just in the Guardian talking about the importance of letting customers leave… but i take your point and that was sort of the reason OpenStack got started in the first place.

      • Cloud Insider

        Yes, that was the key value prop for OpenStack. However it is becoming clear that OS forces no less of lock-in for customers. Every vendor has their own customizations or value added services, and customers end up having to stick with one for end-end use cases and support. That takes away the primary value prop of OS (vs public clouds like AWS, GCE or Azure).

    • Cloud Insider

      Yeah Cisco has no cloud offering, so is probably looking to buy something. But would they really want to buy someone that has already thrown in the towel and could not match AWS/GCE prices, when we know that many more price cuts are coming? Wouldnt they look instead at someone like Digital Ocean?

  5. The whole managed service bubble is quickly coming to an end really isn’t it? SP’s i know have over charged and used thread bare kit providing bad service and people hate the fact they have lost control. This is why the hybrid cloud will be so important as companies want to move services around and have control.

  6. The clear leader is Amazon but Google have very quickly positioned themselves as a credible competitor who has the engineering ability to compete and the willingness to spend huge amounts to develop their products. Microsoft are also developing Azure, which has good adoption and we’re seeing IBM go all out with their cloud products. Those are 4 massive companies all going at the public cloud market.

    Rackspace is an interesting one. They’ve had more time at the cloud than at least IBM and Google but although they have a good product range, don’t seem to be at the same level. Definitely nowhere near Amazon. Perhaps the problem is they are spread quite thin over public cloud, traditional managed dedicated and their software play with OpenStack.

    Rackspace don’t seem to have used their engineering capabilities to build on top of their valuable infrastructure to offer the range of cloud products until it is perhaps now too late?

    They are strong in managed services and support. Can they use that to reposition with commodity compute and storage services?

  7. jhesr

    Hmm, my guess is that its either Cisco or Oracle that are trying to buy them. Both companies are well known for being aggressive acquirers. Right now Rackspace is valued at roughly 4.5 billion. Both companies could easily afford it. Also both companies have said that they are serious about cloud, but neither one seems to have made any progress.

    I don’t think EMC would be a bidder as they already have a strategy in place with vmware and pivotal. Likewise IBM, Microsoft, Google, and Amazon are not going to be interested as they are already competitive in the cloud market.

    HP could be in the running. They are definitely all in with OpenStack. Yet, I don’t think it will be them though making a play for the company as they already have an OpenStack based public cloud. It just doesn’t seem to have much traction. Also I’m not sure HP would be willing to make a big acquisition given their horrible history. Their investors might revolt if HP tried to do another multi-billion dollar purchase.

    I’m going to assume that Dell would not be a bidder as they are already loaded down with debt from going private.

    Hmm… I’m going to have to go with either Cisco or Oracle as the likely acquirer.

    • Cloud Insider

      Yes Cisco is a good guess, in addition to Oracle. I would not rule out HP. Their public cloud is getting minimal traction. They could go the IBM way and decide to scrap their own and acquire.

  8. Cloud Insider

    It is kinda sad. It was great to have a credible (a multi-billion $ cap company, even though its cloud revenues were less than 10% of AWS’s) alternative to AWS, to quieten the OpenStack crowd that tries to position the public cloud as one with no choice other than AWS. Of course they have a much higher cost base, vs AWS that spent a ton of engineering in getting to work well on lower cost hardware. The misguided move towards OpenStack set them back even more. While they spent a ton of time and effort converting to OpenStack, AWS was busy innovating and increased their lead even more. When they had to give up and not match AWS/GCE pricing, the writing was on the wall. They essentially have to go back to being a managed hosting company – a business with lower growth than real public cloud. As much as they tried to spin it as now focussing on managed cloud, any knowledgeable observer knew that they were forced to throw in the towel, and seek alternatives such as a sale. Ironically I am rooting for Google to quickly break the $100M/yr revenue barrier and emerge as a credible alternative to AWS.

    Some vendors that are in even worse shape with their cloud efforts (such as Oracle or HP) will probably buy them. I am not sure whether that helps or hurt Rackspace over the long term.