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
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.
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.
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.
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.
The real question is of "strategy", not "values", in the financial industry.
Anyone have a tl;dr for Apollo on that?
So... this is not good news for the customers of Rackspace.
A good book to read on one of the most notorious examples of an LBO is Barbarians at the Gate  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  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 .
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.
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.
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.
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/
Then the asset stripping begins.
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.
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.
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.
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 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.
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.
Personally, I fall into the group that thinks private equity is probably bad for the economy in general.
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).
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.
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.
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.
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.
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.
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.
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.
Rackspace was launched in October 1998 with Richard Yoo as its CEO
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 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.
Not affiliated with either, just really knowledgable of the industry.
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.
They even started consulting on AWS deployments a while back: "Need some help moving your servers over to AWS? We're here to help!"
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. On the other hand, Amazon's AWS has seen so much growth 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". 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".
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?
Rackspace isn't mentioned as an option as often as they where a few years ago though.
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.
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...
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.
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.)
(to name a few)
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.
What's left will collapse under the debt load that Apollo stuck it with.
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.
Moreso when the company is a mobile gaming company, social media site, or other "time-waster"
AWS was one of the most expensive ones, Rackspace was cheaper
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).
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.
One sign of this occurring is the aggressive layoffs VMWare initiated of its cost centres (e.g. in support) soon after the purchase.
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.
I agree that it does not seem wise for the actual health of the entity.
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%
"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."
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.
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.
Shouldn't your cloud based application manage itself? That's kind of the point, not having to 'manage' it?
Is it time to move forward?? Will my hosting be affected??
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.
Google, Microsoft, Amazon, IBM ( SoftLayer) OVH, AliYun.
Vista - Cvent $1.65B
Vista - Marketo $1.80B
Vista - Ping $600M
Apollo - Rackspace $4.3B (moreso IaaS)
Thoma Bravo - Qlik $3.0B (debatable SaaS)
* 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.