Is Rackspace dressing the bride for a sale?

AWS, Microsoft, IBM and HP among those mooted as possible buyers

HP, IBM, Amazon Web Services (AWS) and Microsoft have all been tipped as potential buyers for Rackspace, amid industry speculation that the firm is up for sale and hunting for a buyer.

The NYSE-listed hosting firm said in 2014 that it had been approached by a number of companies which had "expressed interest in exploring a strategic relationship" with it, with HP tipped as a potential buyer, but nothing came of it. CenturyLink was also rumoured to be interested in the snapping up the firm at the time too, according to reports.

Rackspace completed its IPO in 2008 and its share price peaked in January 2013 at close to $79 (£54.80) per share. Today, the company's shares are trading at just over the $20 mark. In the past two years alone, the company's share price has very nearly halved.

This is just one factor which some Rackspace watchers suggest means the company is hoping to be acquired.

"Whether officially or unofficially, Rackspace is up for sale," said QuantiQ chief executive Stuart Fenton. "There's no question in my mind of that fact. The question is who is the buyer, and what are they buying? Today, I consider Rackspace's model to be closer to that of a reseller like CDW and Insight. They have relatively little IP and are effectively reselling space on datacentres within their datacentre. Their valuation has been coming down for a few years now and it largely reflects their little IP and their focus on the OpenStack technologies, which is free to all. It has undermined their long-term value.

"What they do have as a company is some really fantastic people and wonderful customer service. But their long-term competitiveness I think is unlikely. Whether it's AWS, Microsoft, IBM or HP, one of those people is likely to buy it."

For the three months to 31 December 2015, net profits at Rackspace slumped 13 per cent annually to $32.1m on net sales which grew 10.7 per cent to $523m over the same period. During the quarter, Rackspace announced a share buyback programme in which the company bought $117m worth of shares.

One source, who wished to remain anonymous, said this is another strong indication the company has a 'for sale' sign above the door.

"With the buyback of stock at a massively reduced price... poor reports quarter on quarter, and with the market getting more difficult around them, it would be a bold person to not say [a sale] is a likely option. As an investor or shareholder at the top of such a firm, appraising the market and what you are up against, would you be looking for a long battle of attrition or a smart way to exit and maximise your returns before their value diminishes further?

"If you think about it, if you buy back your stock at a low rate, so you own it, and then you sell the company at a much higher rate, guess who gets the profit? It seems the perfect storm. Stock cost is at the lowest price it has been in [a while] - it is down 50 per cent in two years [January 2014: $36.59 per share, January 2016: $18.84 - down 49 per cent.]"

The source added that Rackspace would be keen for the likes of AWS or Microsoft to snap it up, partially because it has recently struck up strong partnerships with both.

Last year, Rackspace launched its Fanatical Support for AWS managed services offer, signing up 100 customers before the end of January. Rackspace's chief executive Taylor Rhodes has stated he intends for the company to be "the number-one managed services provider for AWS", adding it is "well on the way" towards that goal.

David Terrar, Cloud Industry Forum and Eurocloud member, agreed that it is "logical" for Rackspace to be acquired by a larger player.

"It is a shame really that they won't stay independent and carve out their own special niche," he said. "It is about specialising and carving out their sector. They have got a particularly good reputation in supporting high-volume websites and things. Rather than being general infrastructure-as-a-service, they could focus on specific vertical sectors. They pride themselves on their approach to support too. If I were them I would be sticking to that, rather than looking to be bought."

Rackspace was not available to comment immediately.