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Apollo Global is buying Rackspace for $4.3B (businessinsider.com)
339 points by notmyname on Aug 26, 2016 | hide | past | favorite | 164 comments

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

I work for a relatively big European Network Provider and hoster who got privatized last year. Its not all horrible, but there is a lot of BS going around all the time. The worst are the rumors. You try not to listen to them, but when you are not sure if you have a job in 3 months, and you have spent at least a year more less in the same place, it does get to you. The word from above normally talks a lot of cost cutting and Sales! Sales! Sales!, which makes everyone else who is not part of Sales feel even more left out, as if their jobs are not important.

When people start saying things like: "I don't care, but just tell me if I have a job or not" things are bad. The job market is still bad here in Spain, so a good paying job is hard to get these days. That means a lot of people stick around just for the financials.

I have found some small personal opportunities as well, such as being able to work more from home, making changes in my area regarding things such as legacy products, but anything that costs money is normally out of the question.

I am sorry to read about is, I think I know which provider you are talking about based on some details you provided, and I can only say good things about the services (phone and network) when I used them in Italy (2005-2011). At that time it was considered one of the best, and also used to hired the best. I heard it started going worse with good people leaving around the end of that period, it seems it's not going better..

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.

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.

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.

Your first example is very old school thinking. When a company 'craters' it's not like everyone gets off scott free. All of the people holding the debt, usually big, savvy banks, with the senior tranches of debt have gotten wise to this sort of behavior. And when I say they've gotten wise to it, I mean they got wise to it 20 years ago. In short, if you want to load it up with debt that the company will never pay back and give yourself a big dividend you first have to find someone to lend you that money. If it's obvious to you that that's a bad idea it's obvious to the banks as well.

Most exits in PE are either going public (in which case you have to convince the equity markets that the company is stable), selling to a strategic buyer (e.g., if Apple were to buy RAX from Apollo), or even selling to another PE firm which happens all of the time.

The point is that neither of these scenarios turn out well if you are levering a company up to an unsustainable capital structure.

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

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

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

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...

"management's values" are probably "make money" even for the turnaround PR firms.

The real question is of "strategy", not "values", in the financial industry.

Anyone have a tl;dr for Apollo on that?

Ugh, those guys.

So... this is not good news for the customers of Rackspace.

Whoa, you're username, nice. Anyway, Apollo Global is different from Apollo Group.

Buying a company with borrowed funds and using the company's cash flows or assets to repay the loan is known as a Leveraged Buy Out (LBO) [0]. It was very trendy in the 1980s but has recently made a comeback.

A good book to read on one of the most notorious examples of an LBO is Barbarians at the Gate [1][2] which dealt with the takeover of RJR Nabisco, a large American food and tobacco company.

For lighter fare, re-watch the 1990 movie Pretty Woman [3][4] but this time ignore the fluffy romance and focus on Richard Gere's character, Edward Lewis, as he goes about negotiating the LBO of a shipbuilding company. Edward Lewis was modeled on a real-life LBO guy, Reginald Lewis, who bought Beatrice International Foods from Beatrice Companies in 1987 in an LBO worth $985 million [5].

[0] https://en.wikipedia.org/wiki/Leveraged_buy_out

[1] https://en.wikipedia.org/wiki/Barbarians_at_the_Gate:_The_Fa...

[2] http://amzn.com/0061655554

[3] https://en.wikipedia.org/wiki/Pretty_Woman

[4] http://www.imdb.com/title/tt0100405/

[5] https://en.wikipedia.org/wiki/Reginald_Lewis

I looked into the PE model after meeting a VC firm GP who wanted to find a way to crash that model into the VC model. Dave explained the formula real well but I've also see that a PE firm will sometimes try and raise additional debt financing to grow the business after it purchases the business with debt. Basically the wager is that they can fuel growth (sales) quickly and sell out for a high enough multiple that they make a ton of money in a relatively short period of a few years.

This works in the PE world because these are businesses that have credit and can get debt financing. The typical VC backed company can't get debt financing because they are too risky (early stage) for a traditional lender. That basically but an end to that VC's plan.

Nice explanation.

What if the people that got the mortgage for the house just want to make it pretty an resell it? I guess that's the fear here, when the buyer is an investment company (house flipper) and not a technology company that wants to increase their market share or add technology / talent to their portfolio.

And isn't that usually the case with PE? Are there any good examples of them NOT doing this?

I hear that this financing model allows the PE firm to limit downside (to what they put down) while allowing for unlimited upside (since the equity is theirs). What's in it for the banks that finance most of it? Just the interest on unsecured loans? Aren't these interest rates typically worse than those on retail (house, credit-card, education) loans?

Debt exists in certain tranches, i.e. there will be low interest secured debt, and higher interest unsecured debt. Banks tend to only lend secured debt against assets and/or cashflow. Unsecured debt is often offered by hedge funds (i.e. 6-8-10% instead of 2-4-5%) and is paid down first.

Why do banks love PE deals? Easy: they make a ton of money off of these deals, with moderate risk. If the business goes under, they are first in line to be compensated. If they make 4% on a $500m loan, that's $20m a year.

Thanks for the insightful explanation!

What do PE companies do with more than one company with kind of dated offerings in the same/similar niche?

Reduce the fat, merge them and sell them to a large company?

E.g. Qlik, Riverbed and Dynatrace https://thomabravo.com/portfolio/all/current/

Yeah, that's called a buy-and-build strategy, or a bolt-hole strategy. A large number of industries or market segments that are fragmented end up consolidating this way. For example, Lumison is a data center business here in the UK, and they got bought out by Bridgepoint Development Capital. Subsequently BDC and Lumison went on to buy a few other data centers, making one larger data center with the attendant economies of scale

Typically, borrow the money to buy the company, then transfer the debt onto that company's own balance sheet, meaning they have taken control of a company effectively for $0.

Then the asset stripping begins.

Honest question: if it's that easy, why isnt everyone doing it?

1. You need to find a lender willing to lend you most of the acquisition capital.

2. You also need someone to put up the initial equity capital.

3. You need to find a viable company to be acquired that won't crash immediately upon acquisition, and it can't be too expensive. Your first goal is to recover your equity investment. Everything after that is basically profit.

4. Frankly, 99.9% of people have ethical issues (you risk the jobs of 100s of people by overleveraging) with PE deals or don't have the skills and/or intelligence (managing the financial side + running/growing a business is hard) to be able to execute a deal like that.

If all you care about is making money, then private equity is probably one of the "easiest" ways to build wealth (for yourself, that is). At the end of the day, it's nothing more than buying a companies with a huge loan. There are some billionaire entrepreneurs who have used LBOs as their "empire building" tactic, i.e. Rupert Murdoch, John Malone, etc.

Also, check out Amaya Gaming. Classic LBO play done by an entrepreneur.

It's one of those things that's easy if you're of the right class and have the right contacts. Another example would be Holmes raising billions for Theranos through people who were all friends of her family. You need to know the right people to stake you the initial sum (and who will collect their fee for doing so). A few years at a big bank, then Harvard Business School should do it. Oh and also you need to be completely amoral.

The NYT did a good piece a few years back on how private equity firms totally destroyed Simmons, a mattress company:


Basically, in theory the best way to make money is to serve your customers well. But in practice, financial engineering creates a lot of opportunities where those diverge. This is hard on employees, who value non-financial things like stability and meaning in their work.

I'd say employees certainly value financial things and that "recurring revenue" from their paycheck is one of them. Liquidity events from a transaction would be another. Unfortunately they typically lose the former and almost certainly never get the latter in a PE deal.

I'm not denying the financial angle. But people value job stability beyond the pure impact on their bank account. Even if you know you can switch to another job immediately, the worry that you could be laid off at any moment is unpleasant for many.

The hallmark of being owned by private equity is slashes t every controllable expense, running supremely lean and generally aligning with short term rewards.

Private equity groups don't make money from holding businesses, typically. They make the serious returns when they sell a business to a larger company. Keeping expenses low increases margins and drives the best returns.

The problem is that PE management aligns with short term incentive, which is especially difficult for a tech company where value is often derived from high investment into new and emerging technologies.

You have it backwards. It's activist investors (a.k.a. corporate raiders) that push for short-term improvements in the stock market. Investing in long term growth has been a common reason companies went private. While flipping under-valued companies was popular in the 80's, those days of easy pickings are long gone. Private equity is highly competitive today, and you have to have some real management skill to make money (known as "alpha" in the biz).

One fairly recent example of this in the software business is TIBCO. They were making stupid short-term decisions to satisfy investors. The theory was that going private would allow them to reorganize the business and focus on core competencies without second-guessing by investors.

That or it was just a way for Vivek Ranadive to get the maximum payout for his equity stake so that he could focus on running his NBA team.

As a side note, I went to the annual TIBCO conference right before the buyout and it was pretty clear there that Vivek didn't give a wet rat's rear about TIBCO or software anymore and just wanted to spend his day being an NBA owner.

The easiest and quickest way for the Private Equity company to make your business more profitable is through layoffs. They eventually want to sell the company to make a profit for their investors. In many cases this requires layoffs.

If you want to know more about PE firms and LBOs, check out the book Barbarians at the Gate: The Fall of RJR Nabisco: https://www.amazon.com/gp/aw/d/0061655554

It's a fun read but not very technical, or rather, not technical at all. It's a story, I didn't learn anything about finance or business strategy from it.

Right, it's good for a weekend read. I wouldn't say it's completely devoid of educational value. It's interesting to see how Johnson manages his board relationships, as well as the details of the bidding process and how difficult it can be to form partnerships.

The late 80s were definitely a different time, though - the amount of money needed for the RJR LBO is much more easily accessible to people in similar positions in 2016. As of June 30th, KKR's AUM is $131B, while Blackstone is at $356B.

Another good read on PE is King of Capital (https://www.amazon.com/dp/0307886026).

If you're interested in learning the technical details of corporate finance, you're probably best off starting with something like the Coursera class Introduction to Corporate Finance (https://www.coursera.org/learn/wharton-finance), and then reading the textbooks referenced by the course for a more in-depth understanding.

i read this book, it's good. i got the overwhelming feeling that once started, the buyout process is outside of any one person or group's control. it takes on a life of its own.

I worked for an ISP (Berbee or BINC) that was merged with CDW. It was exactly as outlined above -- the private equity company had a big stake in both and merged them together for a later IPO.

In my experience, it was painful because a small highly technical organization was smashed onto a huge sales-centric company. The cultures were not the same at all. It wasn't horrible and I wasn't there long enough to benefit from anything (the Berbee founder gave some ownership to people who had been there longer -- my stay was brief during and after college so it was fine by me). But the resulting company wasn't as interesting to work at and today many of the people I knew who worked there moved on to other competitors in the local market. Nothing wrong with change but it was an awesome company before the merger.

So you might expect in the future to be merged with a company that looks good on paper but is painful in practice. But of course from the PE viewpoint, the point is to make money so as long as that happens, it's a win. It's just their interests are probably not aligned with yours.

It doesn't seem so hard to figure out. The problem is the company is now just part of a portfolio that needs to perform to a certain level. The level of uncertainty with respect to Rackspace just increased 1000% both internally and externally. To me, private equity is a vote of no-confidence.

Personally, I fall into the group that thinks private equity is probably bad for the economy in general.

Look up the terms "profit center" and "cost center". As soon as you hear your area being described as a "cost center", start looking for another job.

It's such a great example of how accounting drives insane decisions. I will die happy if I can get people to stop thinking in terms of profit vs cost and instead think in terms of value and waste, as the Lean Manufacturing people do.

A typical PE buys the company with 20% cash down, and 80% debt (i.e. money borrowed from a bank).

They now have to find extra profit to pay the interest. Ideally they also get a healthy dividend or management fee every year.

This inevitably comes down to a. increased sales b. cost (i.e. salary) cuts

They also want to resell/IPO the company in 3-7 years - obviously for money than they paid for it. This is another constant pressure to increase profit (see a & b above).

HOWEVER Growing companies are usually not for sale and are very expensive. They cant be bought by PE. PE often looks for a troubled company which can be bought on the cheap, and can be somehow be kept profitable for a few years.

Hence (a) is difficult leading to focus on (b)

This of course is not all bad. Some academic studies have shown that PE companies do grow over time. The new management can trim the middle management roles and invest more in real r&d and product. YMMV

Let me guess.. media.net?

Since all the other comments are negative, I'll chime in with a somewhat positive experience with a PE firm (although it wasn't a complete going private move).

I worked at OnSemi during the period that TPG was a significant investor. Initially they did enforce some fairly strict standards about how money could be spent. And there was a lot of BS where the quarterly numbers were almost enough to beat the street and so employees were forced to take accrued vacation. However, at the end of the holding period, TPG moved from a "lipstick on the pig" strategy to one of making OnSemi a better company and loosened the purse strings.

Hmmm, in another domain I'm familiar with, Cerberus Capital Management smushed together a number of firearms and ammo companies into the Freedom Group (https://en.wikipedia.org/wiki/Freedom_Group), and without to my knowledge screwing them up.

That said, Remington Arms is still a sub-par manufacturer of guns, they haven't noticeably improved their quality, or behavior when caught out, see e.g. the lawsuit they continue to lose WRT to their unsafe Model 700 rifle safeties.

Most of the "freedom group" make the same thing or operate in the same space. That is "tacti-cool" and people that want their names on lists for silencers, SBR's and other goodies they make.

I bet there was a crap-ton of consolidation that we didn't hear about. I bet a lot of people lost jobs in said consolidation.

No, not really. Only one of their companies is inherently into NFA items, and H&R and Marlin, which bought them prior to it being bought by Freedom, and Dakota and Parker (!) aren't even into those sorts of guns. And Barnes only makes ammo and especially bullets. (Para USA makes double stack 1911s, which are technically "assault weapons" due to the increased magazine capacities, but based on an 106 year old design.) Only Advanced Armament Corporation (silencers), Bushmaster, DPMS, TAPCO (accessories) sell such items, and maybe you'd count Remington's hunting configured and camouflaged AR-10 and AR-15 pattern rifles, but that makes them the antithesis of "tacti-cool".

The loss of jobs from the consolidations are well known, plus overlaid with that is Remmington moving more and more stuff out of high cost, unionized, viciously anti-gun New York state, away from their original factory, where they were the first who's still in business to make arms in the US (or so they say, e.g. https://en.wikipedia.org/wiki/Remington_Arms and it's certainly a very old company and that complex is obviously very old).

ADDED: Without consolidation, it's entirely likely one or more of the traditional hunting arms companies Marlin, Dakota and/or Parker would have gone out of business like H&R did, there's much less Gun Culture 1.0 demand for such, and plenty of fine used specimens available.

Remington might have been less likely to do that if still under their original management, on the other hand, under Cerberus they were the first US ammo manufacturer to respond to the 2008 and on ammo shortage by buying new capital equipment to set up new production lines, which is not supposed to be the usual MO of private equity owned firms.

So my point is that these consolidated companies' products haven't, to my knowledge, suffered from the process, whereas a lot of us fear Rackspace's offerings will suffer (well, even more than they do today, one reason we can be pretty sure they put themselves up for sale).

ADDED: On the other hand, Zilkha & Co, which bought 85% of Colt, is raping it up, down, right and left, the very worst sort of this type of thing.

Isn't this deal similar to Dell going private?

I can certainly imagine how it might not end well for a company that gets taken private, but I also think that trying to innovate and grow in such a competitive environment would be even harder if you have to worry about shareholders breathing down your neck.

Dell going private with it's original owner is very different than a portfolio company taking a company private.

Ah, yes, that's a good point.

I believe the rumor is they are going to buy hpe after their spin off/merge with CSC. There might be an opportunity there.

Jesus Christ when will this end. I work for HPE and everything is constantly on hold, waiting for these split offs, mergers, new financial year etc. Cant get any travelling or training done. No internal moves. Staff quitting left right and centre. I'm tempted to join them

> $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.

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. :)

2011-2013 surely :-)


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

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.

I recently had a very, very poor experience with them and their Managed AWS Cloud Services. I escalated and the sales rep stated "I'll share your feedback with leadership." Haven't heard another single word out of him. As you can imagine, their days as a vendor are numbered.

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

I've gotten the same recommendation from them. I complained because they pulled the network connection on the drive connected to the database and completely torched the drive. They were like: well maybe you should consider running multiple database machines with replication so you can survive the next time we screw things up.

This is true for all VPS hosting. They're cheap because they're commodity hardware that sometimes fails.

Full VPS backup should be standard feature of all premium providers...

You'd think, but then they lose that easy upsell.

And get tons of support requests and risk their brand name.

This sounds to me more like a procedural than a hardware failure.

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.

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

This was exactly it.

I don't know about the poster above, but commonly load balancers can be used to do SSL termination, which can significantly improve application performance.

I want add that their UI is awful too. Errors and slowness and their imaging system is constantly failing. We're testing out vultr for cost, speed and simplicity.

Vultr seems to take longer than digital ocean to get to a prompt from creation. But if you're not rapidly spinning up dozens a day it may not matter.

I also feel like they don't communicate maintenance windows or outages as well as they should.

But I still use them because they have a Dallas location and DO doesn't.

I was at RAX back in the early cloud days. The console has a long and sordid history. I was under the impression they bought CloudKick just to get the team to build a better console. Somewhat surprised it's still bad; somewhat not.

Thing is, their product has been inferior for years! You wouldn't believe how bad it used to be. The current state of rackspace cloud is great, compared to how it was in 2010.

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.

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

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

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!

If you're looking for premium, I'd check out LiquidWeb without hesitation. LimeStone Networks is also up there.

Not affiliated with either, just really knowledgable of the industry.

I would recommend that you look at SoftLayer, or if you'd like to avoid someone part of a larger company (IBM), SingleHop has also been awesome to work with.

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.

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!"

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.

>Re: "Business not in terribly good shape" - there are 4.3 Billion reasons to suggest otherwise.

I believe the "not terribly good shape" is a measurement that's _relative_ to other competitors in the cloud infrastructure market.

Rackspace's yearly revenues ($2 billion) have gone nearly flat[1]. On the other hand, Amazon's AWS has seen so much growth[2] that they now pull more revenue per quarter ($2.5 billion) than Rackspace does for the entire year.

Back in the early 2000s -- before AWS hit the scene, Rackspace hosting was attracting customers with excellent datacenter uptime and "fanatical support"[3]. Those 2 factors are not meaningful enough to the cloud subscribers today which is why Rackspace tried various strategies such as promoting OpenStack (hey don't be locked into proprietary AWS!) and then eventually "consulting services" to help customers use AWS. Neither of those initiatives really moved the needle.

I'm currently a Rackspace customer spending $120 a year for them to host my email but customers like me are part of a dying source of revenue. (Everybody can use GMail for free!).

Rackspace is "mature" instead of being "hot growth" which often translates to "not doing too well".




This impressive (?) valuation is not so impressive compared to what it used to be. Fun fact: any current shareholder that bought the stock between June 2009 and August 2015 would have done better buying a S&P 500 tracker.

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

>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?

I've had this experience as well. I thought it was a little funny that they would let us pay them to move us off their own service.

If we quickly compare Rackspace [1] against Amazon (as a whole) we can find Rackspace margins are bigger except on "Return on average equity".

[1] https://www.google.com/finance?q=NYSE%3ARAX

[2] https://www.google.com/finance?q=NASDAQ%3AAMZN

It's not that uncommon for hosting companies to do AWS consulting. It's a way for the company to get customers that they might otherwise lose, and then perhaps they can move them to their own infrastructure at a later point.

Rackspace isn't mentioned as an option as often as they where a few years ago though.

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).

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.

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.

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...

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

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.

Oh Yikes, totally forgot Mailgun is owned by RS. I have a few things using the Mailgun API too. I am hesitant to move to Sendgrid with what happened a couple of weeks ago and how they handled the outrage.

At this point, I may just setup & manage my own box for email again. It is a real PITA but I just don't have a lot of faith in these 3rd party API's anymore.

There's always Amazon SES when looking for cheap, low-volume transactional email, but it's always a headache to setup.

Used SES in the past. Poor delivery and they are super strict especially once you start sending volume.

Yep - building out a solution with Mailgun at the moment, and has all the features I need and want. Probably comparatively simple to use Amazon SES, Postmark or Mandrill, but MG's been solid in development.

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.

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

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.)

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)

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.

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.

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

What do you mean?

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.

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

That is dark and I like it. Seems to be what everyone is doing these days, just manipulating the books to make things look good before offloading to the next sucker.

That's a prediction, I believe, that Apollo will run Rackspace into the ground or perhaps just accelerate their demise in the confrontation with the big three competitors.

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.

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.

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"

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

If you will price on valuations: 1 Rackspace == 0.2 Snapchats per $22.7B valuation in May 2016.

0.2 Whatsapps

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

Very different set of customers. Rackspace's self-service cloud has always kind of sucked, and they knew it -- they'd much rather work upmarket with companies that want to outsource infrastructure engineering as part of their hosting bill.

Great customer service.

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.

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.

Are you sure?

AWS was one of the most expensive ones, Rackspace was cheaper

Back in 2009/2010 when I was looking into it AWS was half the price for a roughly equivalent instance.

Did you run any benchmarks? Because I was looking at both during the same timeframe and Rackspace offered about 20-30% more 'operations'/dollar in our case.

Looking at their site it seems now what they do is resell AWS/Azure/Google offers, which is weird (and dedicated servers, which was what they always did)

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?

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).

(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.

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.

They've done amazing things for the community. I can only hope that Apollo group continues the local outreach!

I hope that fat doesn't include their free accounts for OSS projects and communities, that'd be sad.

The Dell/EMC purchase may have been just to buy and then sell VMware, which EMC owned. If I recall correctly, EMC and VMware had both lost meaningful value after uniting and it was commonly held that VMWare was worth much more, so Dell is likely try to rip those two apart, pump VMware back up, sell it at a profit on the whole EMC purchase, and keep the EMC assets as gravy.

One sign of this occurring is the aggressive layoffs VMWare initiated of its cost centres (e.g. in support) soon after the purchase.

I agree with your speculation; it seems likely, however, I don't understand why laying off staff at VMware would help make the company stronger - is it just supposed to make the balance sheet look good in the short term?

Short-term results oriented layoffs like this decimated HP under Carly Fiorina, and I don't have a good long-term outlook on VMware, if Dell decides to take a similar approach.

My understanding is that it is purely to improve the short term outlook on paper.

I agree that it does not seem wise for the actual health of the entity.

All of the above.

AWS (AMZN's public cloud reporting segment):

  FY15 Revenues: $7.8 billion 
  CAGR (FY13-FY15): 59% 
  FY15 Op Margin: 23%

  FY15 Revenues: $2.0 billion
  CAGR (FY13-FY15): 14%
  FY15 Op Margin: 10%

They're targeting different segments on different business requirements. Their numbers will never be comparable.

RAX's strategy has shifted to "different segments" directly as a result of competition from AWS [0]. Now, AMZN has considerable supplier power over RAX:

  "The deal would have been unthinkable just two years ago, 
  when Rackspace and AWS were fierce rivals. But in early 2014, 
  Rackspace, facing ever slimmer margins amid a cloud-computing price war, 
  withdrew from head-to-head competition with Amazon. Since then, 
  it has focused on offering higher-margin services."
[0] http://www.wsj.com/articles/rackspace-teams-up-with-amazon-1...

Yes but even prior to this, Rackspace had been a managed cloud provider, meaning they offer services on top of the infrastructure. This is different than AWS.

RAX has its roots in managed cloud, but they moved away from that. They got into IaaS, but have retrenched. Here's RAX's mapping of AWS to RAX P&S for IaaS [0]. That's a lot. RAX has decided to return to its roots (managed cloud) and seek differentiation because it can't compete on IaaS.[1] That'll be tough.

RAX's going private to shift its P&S mix and turn things around.

edit: I'll also point to jsode's great comment above.

[0] https://support.rackspace.com/how-to/mapping-of-amazon-web-s...

[1] http://www.networkworld.com/article/2461361/iaas/rackspace-b...

Rackspace's IaaS offering was never close to what AWS, Azure or even GCE offer.

It was more similar to DigitalOcean or Vultr, who are not really IaaS but VPS providers. I mean, where are the VPCs? the incredibly redundant load balancing? the VPN gateways, etc?

Disclaimer: It has been 2 years since I evaluated RAX's offerings.

Rackspace offers most of the services Amazon/Google/Microsoft does - but you're right, they did start out as Slicehost which is a Linode competitor (back in what...2009?)

Isn't 'managed cloud' kind of contradictory?

Shouldn't your cloud based application manage itself? That's kind of the point, not having to 'manage' it?

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??

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.

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

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.

So what other BIG Cloud Hosting Companies are there left?

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

Digitalocean, Vultr, Cloudways, Bluehost

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

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

I was wondering this myself.

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)

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)

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)

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?


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

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

Is it too late to sell it to Yahoo instead?

Are Apollo likely to make money from it?

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.

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

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.

...and that's if things go as planned, where the result will be a smoldering mess of mediocrity.

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