
Apollo Global is buying Rackspace for $4.3B - notmyname
http://www.businessinsider.com/apollo-is-buying-rackspace-in-a-43-billion-deal-2016-8
======
chollida1
I guess it was only a matter of time before they got bought out. It's tough to
compete against one of Google, Amazon or Microsoft, competing against all 3 at
the same time in an area that all three consider to be core to their future
must just be cut throat!

It's never great for a companies employee's to be taken over by a private
equity firm, if you actually find someone whose had a good experience then
please let me know, but given that this is a 38% premium over what RAX was
trading at when the deal leaked on august 3rd, this is almost best case for
rack space employee's and given that this is an all cash transaction they
should get some liquidity out of the deal!!

Given that the RAX board unanimously approved the deal, I'm going to guess
this is going through.

Often when a company is brought private by a PE firm they'll combine it with
other portfolio companies before spinning it back out. I don't see any
relevant companies in Apollo's portfolio that could be joined to RAX.

If you are wondering who in wall street makes money on these types of deal,
its the usual suspects. Everyone wets their beak in take over transactions:)

\- Financing provided by Citi, Deutsche, Barclays, RBC;

\- Goldman advised RAX, Morgan Stanley also provided services in connection w/
deal; Citi, Deutsche, Barclays, RBC advised Apollo

~~~
whateverdudes
Off topic, but can you tell me more about the issue with being taken over by a
private equity firm? I work for a 10k employee company who will be taken off
stock exchange and sold to a Chinese equity firm.

~~~
dave_sullivan
Besides cost cutting via layoffs being a favored (although by no means the
only) strategy for PE firms, there's also debt servicing.

Typically, PE companies buy the company while only putting down a small
portion of the purchasing price. They finance the rest through banks. The
whole concept is pretty similar to buying a house with a mortgage, except
you're buying a company. The debt payments are then a tax write-off, and
all/most available company cashflow is diverted to paying off that loan. The
ideal company is one with reliable cashflows and access to a growing market
(of which I'd say a large cloud infrastructure provider fits the profile).

To improve cashflow: pay fewer people less, convert assets to cash, and/or
make more money from your core business. Usually a mix of the three.

From an organizational standpoint, you can think of it like Rackspace just
took out a very large (maybe subprime) mortgage on the company and some new
people are going to try to make sure that doesn't turn out to be a horrible
bet, first for the investors, then for the company.

~~~
narrator
It also depends on the kind of PE firm. The vulture firms will buy a stable
firm and load it up with debt doing stock buybacks and then cash out and let
the company crater.

Other firms, like Texas Pacific Group, are turn around specialists that take
struggling firms and fix their business processes to make them run better and
raise the stock price by actually building a better company.

There are a lot more of the former than the latter, mainly because it takes
some uncommonly smart people to run the latter kind of fund and just a bunch
of bean counting jerks to the run the former kind.

~~~
r00fus
So where does Apollo Global sit on this spectrum of PE vulture <-> turnaround
?

~~~
frakr
They own for-profit education companies like University of Phoenix. Read up on
their history, especially the law suits, to get an idea of what the
management's values are like:
[https://en.wikipedia.org/wiki/University_of_Phoenix](https://en.wikipedia.org/wiki/University_of_Phoenix)

~~~
dfriedmn
That's actually a different firm called Apollo Group (which is mostly
comprised of Phoenix and a small number of other things) – Apollo Global is a
much larger private equity firm with a confusingly similar name

~~~
slavik81
It appears that Apollo Global is part of a consortium that bought Apollo
Education Group earlier this year [1]. Looking at the press releases, those
appear to be the two Apollos in question. Though, I suppose you should give
them some time to see what they'll do with it.

[1]
[http://www.streetinsider.com/Corporate+News/Apollo+Global+to...](http://www.streetinsider.com/Corporate+News/Apollo+Global+to+Acquire+Apollo+Education+Group+\(APOL\)+for+$9.50Share/11287230.html)

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colinbartlett
> $32 per-share-offer represents a premium of 6 percent to Rackspace's
> Thursday closing price.

Quite a fall from almost $80 in 2013.

I was a satisfied Rackspace customer back around 2001 when I had a web hosting
business, but it was truly a premium service - very expensive compared to
competitors. We ended up going with our own bare metal eventually. Then, when
everything moved to the cloud, Rackspace seemed a little behind the times and
Heroku and AWS got my business.

~~~
pcurve
ditto. customer in 2001-2003. Definitely 50% more than competitors back then
for just a basic dedicated unix box. But founder and chief evangelist paid us
a visit at our dinky little office in Manhattan, so that was a treat. :)

~~~
nullcipher
2011-2013 surely :-)

~~~
taspeotis
[https://en.wikipedia.org/wiki/Rackspace](https://en.wikipedia.org/wiki/Rackspace)

    
    
        Rackspace was launched in October 1998 with Richard Yoo as its CEO

------
colinramsay
Over the past six months I've been battling with poor service from Rackspace,
with hosts mysteriously dying and their agents are trying to upsell me (load
balancers for a single server, for example). We're migrating away but this
doesn't surprise me.

~~~
evanscottgray
what was the use case when they wanted you to have a load balancer for a
single server..?

~~~
alanpost
I was told it was to avoid changing my DNS when I spun up a new server. With
the load balancer being $50/month; that was the pitch that put me off
Rackspace.

~~~
leesalminen
The LB itself (in IAD) is $10.95/month + traffic.

------
20years
I still have a couple of dedicated servers with Rackspace. Been with them for
over 10 years and am sad to see this. They truly did have the best support and
were an amazing partner to my business in the earlier years.

I knew this was coming and have moved a lot of our stuff off in preparation.
Partly because of the unknown but also partly because their support has
diminished over the past 2 years.

I was kind of hoping Amazon would acquire them. I don't have much faith with
the purchase being a PE firm. Time now to move the rest of our stuff off.

~~~
leesalminen
I'm in the same boat. Where are you moving to?

~~~
20years
We have moved a lot of our stuff to AWS and plan to move 2 more sites that are
on the RS dedicated server to AWS. 1 service in particular really does need a
dedicated server and we plan to move that to a Hostnexus dedicated box. We
have a couple of other boxes with Hostnexus that we have had for years. They
are not as good as RS but they do have decent support especially for the price
of the boxes (fraction of RS) [http://www.hostnexus.com/solutions/dedicated-
hosting.php](http://www.hostnexus.com/solutions/dedicated-hosting.php)

~~~
ezequiel-garzon
How come this is an order of magnitude more expensive than European providers
such as OVH and Hetzner? Are there "American equivalents" of OVH and Hetzner?
European goods are generally pricier, not the other way around!

------
abakker
Rackspace's problem is this: they are not really a hosting business. They are
a Managed services business. They USED to be a hosting business, but it turned
out that their real value add was in running clouds for companies that
couldn't do it themselves. My guess is that the real reason they sought this
is that the hosting business is not going to grow, and they don't want to
invest in it. Instead, they are going to transition into becoming a managed
services provider for Openstack private clouds (customer premises or equinix),
Azure and AzureStack, and AWS.

Many enterprises are not making the transition to Cloud cleanly, and Rackspace
is positioning themselves as the premier services provider to deploy, manage,
and monitor cloud usage for many organizations.

~~~
abakker
Shameless self plug - [http://insights.isg-one.com/rackspace-sold-toward-
future-man...](http://insights.isg-one.com/rackspace-sold-toward-future-
managed-cloud/)

------
rkrzr
Rackspace has been looking for a buyer for a while. I suspect that their
business is not in terribly good shape.

They even started consulting on AWS deployments a while back: "Need some help
moving your servers over to AWS? We're here to help!"

~~~
ghshephard
Re: "Business not in terribly good shape" \- there are 4.3 Billion reasons to
suggest otherwise. This isn't the type of business that gets purchased without
a lot of due diligence, and, we're not really in much of a tech bubble right
now - so I thinks it's reasonable to asses that the underlying revenue/profit
of Rackspace was sufficient to justify the (impressive) valuation.

~~~
ryanSrich
The assumption on Hacker News is that a buyout/acquisition === failing. This
is sometimes true and sometimes not true.

~~~
forgetsusername
> _The assumption on Hacker News is that a buyout /acquisition === failing_

Their market cap was over $10BB a few years ago, and they were purchased for
less than half of that. _Something_ went wrong; what do you suppose that was?

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jszymborski
I'm praying that Mailgun doesn't get affected by this, they're absolutely
awesome for the small shops like me (and easy to integrate).

~~~
jordanlev
Just went through this process with the Mandrill debacle earlier this year.
I've found SendGrid to be on par with Mailgun (with a less wonky admin
dashboard too). Both have comparable 10k~12k free sends per month.

If you're using the SMTP gateway instead of direct API integration (which is
the only way I'd do it these days, after dealing with a bunch of sites that
were tied to Mandrill's API), then there's not really much that needs to
happen for the switch.

~~~
Sir_Cmpwn
I just switched to running my software's email from my personal mail server
when Mandrill died. Setting up your own mail server is a pain in the ass but
it has paid off 100x imo.

~~~
gbl08ma
I used to send emails from my own servers, with everything configured
according to the best practices, as much as I could. This was for account
management emails: things like verifying user accounts, resetting passwords,
etc.

It seems my emails were getting into spam boxes or outright rejected over 50%
of the time, which obviously was driving users away. Mails would sometimes be
classified as spam on my own Gmail, even after telling it multiple times to
not mark those emails as spam. So I switched to Mailgun, and things have been
much more peaceful - sometimes emails take a while to arrive, but I don't
remember the last time anyone said it was in spam. It was not about the email
content, as the content didn't change...

What's your experience with this? I suppose some domains/TLDs and certain IP
address ranges are more prone to be classified as spam than others, and that's
why I prefer using an external service: hopefully these guys can control their
infrastructure in ways I can't do with mine. But I'm also a supporter of
Internet decentralization, and email is one of those things that in principle
is easily decentralized...

~~~
Sir_Cmpwn
It takes a lot of upfront work, but I haven't had to do much maintenance on it
since the initial setup and my emails get delivered. You have to set up SPF
and DKIM, appeal to the blocklists, and set up reverse DNS. Then you have to,
you know, not spam people. I highly recommend mail-tester.com, you can send
them an email and they'll tell you how to improve it. Here's my score:
[https://www.mail-tester.com/web-ghs5t5](https://www.mail-tester.com/web-
ghs5t5)

~~~
gbl08ma
Thanks, I didn't know about mail-tester.com and similar tools. I am definitely
not spamming people, and I had SPF, DKIM and reverse DNS set up, but I don't
think I ever did the blocklists part. Something to keep in mind if my projects
ever grow too big to fit in the free tiers of Mailgun and similar services.

------
gtrubetskoy
Interesting. In contrast just about a year ago Verio's web hosting assets were
sold to EIG for a mere $36 million. Both companies were founded around the
same time ~ 1996, and at some point at the top of the dot-com boom were the
two dominant dedicated server providers out there.

~~~
scurvy
Verio's big play was in the transit business; they ultimately became NTT
America.

------
akulbe
I understand that publicly traded companies are one cornerstone of our
economy.

That said, it's depressing to see companies get bought and sold just to move
money around, and the people that work in those jobs completely ignored, or
just seen as pawns to manipulate for nothing more than the bottom line.

To me, when a company goes from private to public, it's not something to
celebrate in the long-term.

The company's focus inevitably seems to go from doing/creating something
innovative, to maximizing shareholder value at _any_ expense.

Rackspace was awesome. RIP Rackspace. (I don't know this for a fact, of
course... but as others have surmised already, this will likely be just
another pump and dump.)

~~~
akulbe
When I think of companies "doing it right", I think of the ones who choose to
stay private and retain control. Slow but methodical growth.

Basecamp. Dyson. Cargill. Patagonia.

(to name a few)

------
laveur
I've been a loyal rackspace customer since 2011. I really hope that if this is
indeed true, as I will wait until Rackspace officially announces it, that
Appollo doesn't destroy the good things Rackspace has going for it. Mainly
their wonderful customer support.

------
nl
So I think people are missing some points around this deal.

Investment firms like hosting companies for two reasons:

1) They give predictable revenue, which is a great thing. Even if the profit
rate isn't amazing, the revenue gives a lot of cash-flow.

2) They (often) own large infrastructure asserts (data centers), which can be
depreciated and used as a tax write-off.

Not saying that they won't want to take costs out of the business too, but the
motivations for a purchase like this aren't as simple as one might think.

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kolbe
Nice. So in a few years, there will be one less competitor in this space.

~~~
cpach
What do you mean?

~~~
kolbe
I think this is a smash-and-grab deal. They'll write down RAX's assets, then
sell them while calling the difference between their sales price and the
written down value "profits." They'll dish themselves out a dividend from the
sales, maybe issue some more debt to buy additional infrastructure, then IPO
it knowing that blackrock and fidelity and pension funds only look at earnings
when they value companies (which they manufactured with their accounting
gimmick), and flip the remaining shell of a company on to them for a hefty
return.

What's left will collapse under the debt load that Apollo stuck it with.

~~~
shostack
Surely analysts at the companies you mentioned are wise to this and factor in
the likelihood of this happening, no?

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spriggan3
I'm sure Rackspace is a great service for established companies and startups
but for the rest they were always too expensive. I never felt like the premium
paid made a difference.

------
inputcoffee
I like to look at comparisons like this:

That is about 1 Yahoo in 2016

Or about 3 youTubes in 2006

Or 1.5 Lucasfilms in 2012

Or 0.2 Whatsapps in 2014

EDIT: Whatsapps number corrected, thanks.

~~~
schnevets
1 Marvel. Marvel is always my measurement for these acquisitions. It's always
fun to compare acquisitions to a cultural icon with +50 years of history.

Moreso when the company is a mobile gaming company, social media site, or
other "time-waster"

~~~
inputcoffee
Yeah, I refer to Lucasfilms for almost exactly the same reason.

------
thedlade
Their service is very expensive compared to Google, AWS and the rest. I wonder
how they've managed to survive on their own for so long

~~~
brightball
Great customer service.

~~~
arethuza
Shockingly bad pre-sales though - in my last job I tried to engage with them
on the hosting for a large scale ERP project for a multinational and they were
pretty reluctant to get involved even though they advertised that they were
targeting that niche and claimed expertise in the ERP application.

~~~
AndyNemmity
This is really a huge difference in the enterprise space. Projects are won and
lost on the most trivial things, and having very intelligent people in
presales is so critical.

------
jdpedrie
Has there been any analysis on the upswing in acquisitions of cloud computing
and storage companies? First EMC gets bought by Dell, now Rackspace is getting
picked up. Is it just in response to growth on the part of Google and Amazon?

~~~
roymurdock
Apollo is a private equity firm, so they are most likely acquiring Rackspace
because they see fat they can trim (read: laying people off, outsourcing
labor, tax optimization) off a decently competitive company that they can
possibly take public or sell in 5-10 years.

It's not so much about competing with Amazon, Google, etc. or advancing the
state of the technology as much as making a bet that the brand is currently
undervalued and that conditions in the cloud computing market will allow for a
profitable exit in the medium term.

For examples of Apollo bets that have gone wrong see its LBO of Harrah's
(basically bankrupt) or Linens 'n Things (bankrupt).

~~~
pm90
(Disclaimer: former employee of Rackspace) That is exactly how I read it.
While Rackspace has been doing pretty well, its just not growing as fast as
its competition and Wall Street in concerned.

It is a big shame though. Rackspace is one of the few Texas-born companies
that managed to strike it big and still have a very egalitarian culture. They
have a very interesting culture and I wish it was something that could go on;
a lot of my former coworkers absolutely love that environment. But it doesn't
look like it will last for much longer.

~~~
charlesdm
For a successful LBO, growth is largely irrelevant. What is relevant however,
is that you can protect your existing market share. If you can buy a company
for $1bn with $800m in debt and pay that down, and sell it for $1bn again 5 or
10 years down the line, you just made a cool $800m. If you can double the net
profit, you'll be able to sell it for $2bn, etc.

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joering2
I'm only missing one thing out of your comments -- what will change for
someone who spends over $10,000 per month across US, UK and HK on servers and
hosting.

Is it time to move forward?? Will my hosting be affected??

~~~
cannonpr
If you have a stable codebase and infrastructure you can probably still keep
using them, if you rely on their technical services heavily I would start
looking around. I expect most of their good people won't be there for much
longer. In other words the services they provide you with will likely rapidly
degrade.

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keenerd
As someone who's first VPS was from Slicehost: Oh, not this again.

------
kondro
This is the wrong time to be in the datacentre business. Especially one that
traditionally provides a high-touch, traditional bare-metal based model.

It probably doesn't make a dent in their revenue, but Xero is just completing
their migration from Rackspace to AWS for reasons they don't articulate well.

------
ksec
So what other BIG Cloud Hosting Companies are there left?

Google, Microsoft, Amazon, IBM ( SoftLayer) OVH, AliYun.

~~~
jamilaliahmed
Digitalocean, Vultr, Cloudways, Bluehost

~~~
ksec
none of these are anywhere close to be size of the above.

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clavalle
I wonder if this will mean an influx of capital in the Austin/SA area.

~~~
avelis
I was wondering this myself.

------
mathattack
Is the playbook "Financial engineering, and decrease support for existing
customers"? (Financial engineering meaning load up on debt, where interest
payments can be written down)

------
mbesto
Interesting year so far for PE M&A in SaaS companies

Vista - Cvent $1.65B

Vista - Marketo $1.80B

Vista - Ping $600M

Apollo - Rackspace $4.3B (moreso IaaS)

Thoma Bravo - Qlik $3.0B (debatable SaaS)

~~~
frik
Thoma Bravo has then

    
    
      * Qlik (BI)
      * Riverbed (APM, app & network analytics)
      * Dynatrace (APM, app & network analytics)
      * Compuware (mainframe maintenance, Dynatrace was a business unit of Compuware)
    

[https://thomabravo.com/portfolio/all/current/](https://thomabravo.com/portfolio/all/current/)

What does Thoma Bravo do with two old-school APM companies that barely provide
a modern cloud service, a BI that barely provide a cloud service and a stone
age relict? Will the merge the company assets and lay-off some "fat"? Or wait
until IBM or Microsoft wants to buy one of their companies?

------
pbarnes_1
RIP.

SoftLayer has been growing substantially after the IBM acquisition. This space
is pretty interesting.

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soperj
Wonder what this means for mailgun. They have wonderful customer support.

------
ramaro
Is it too late to sell it to Yahoo instead?

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mkj
Are Apollo likely to make money from it?

~~~
samfisher83
PE companies usually do. They will just layoff a bunch of people cut salaries
and probably saddle it with debt and get as much cash flow they can from the
company.

~~~
bluetwo
Layoff the people with know-how, but also hire a bunch of salespeople with
lucrative commission plans.

~~~
kregasaurusrex
Primarily this. PE firms tend to do a poor job at putting people in charge who
know a company's full stack operations, and tend to underpay new non-sales
hires which results in a net loss of talent for the company. Do this too often
and you become a stagnant company that can't draw in new customers.

