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After the markets closed, Rackspace said that it hired Morgan Stanley to explore strategic options, including the sale of the company. The company’s 8-K filing disclosed that Rackspace has received inbound proposals in recent months, coinciding with the departure of former longtime CEO Lanham Napier.
For the past several years, Rackspace has been the subject of M&A rumors. The OpenStack software that Rackspace co-founded is considered the next-generation technology for private clouds and is highly disruptive to the existing hardware and software ecosystem. We attended the OpenStack Summit this week, where we learned how the software is gaining traction across the Fortune 500.
However, Rackspace has had difficulty keeping pace with Amazon Web Services and with monetizing OpenStack’s nascent popularity. OpenStack is still in the early innings of paid deployment, and Rackspace lacks the enterprise reach of many of its competitors, namely Red Hat, VMware, HP, and Microsoft. Because Rackspace operates the largest production deployment of OpenStack and is the second-largest public cloud provider to Amazon Web Services, it could be a strategic asset to other companies in the OpenStack ecosystem, such as AT&T, IBM, HP, and VMware.
AT&T and EMC had been widely reported to be interested in Rackspace competitor SoftLayer, which was eventually acquired by IBM in June 2013 for roughly 11 times EBITDA. Other recent transactions in the data center space have averaged a higher multiple, 12.8 times forward EBITDA, which would imply a $54 share value on our 2014 EBITDA estimate.