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Apollo Global Management Buys Rackspace

Financial Information
  • Enterprise Value                                    $4.13 Billion
  • EV/LTM Revenue                                  2.0x
  • EV/LTM EBITDA                                   7.0x
Transaction Facts
  • Cloud hosting and computing provider Rackspace Hosting Inc. (NYSE: RAX) announced today that it had entered into a definitive agreement with private equity firm Apollo Global Management LLC (NYSE: APO) to be taken private.
  • The transaction is priced at $32 per share, a 38 percent premium over the company’s share price before news of a potential deal appeared in the Wall Street Journal on Aug. 4. The amount represents a 6 percent premium over yesterday’s closing price.
  • Apollo, a leading private equity firm and owner of several large IT Services assets such as Presidio, is being joined in this acquisition by Searchlight Capital Partners, which is also making a strategic equity investment.
  • Once the transaction closes in Q4 2016, Rackspace will operate as a private company.
The Early Bird Doesn’t Always Get the Worm
  • Early Leadership Faded Amid Cloud Giants: Rackspace was originally one of the leaders in the public cloud space, but the company has struggled to match the popularity of hosting giants Amazon, Microsoft and Google as they have established themselves as the major players in the IaaS space. As a result, the company has shifted its offerings to prioritize services that supplement, rather than compete with, its peers’ cloud offerings – a transition that is expected to accelerate under private management.
  • Slow But Steady Not Fast Enough: Rackspace’s services pivot has resulted in the company enjoying a string of earnings beats, though revenue performance has been inconsistent. Investors have been unconvinced, with the company’s stock trading as low as $16.76 in February (down from above $80 in 2013) amid doubts about the company’s viability.
  • Squeezed Out: The rise of “hyperscale” cloud providers such as Amazon, Microsoft and Google has had a dual impact on Rackspace – not only has the company been unable to match its well-capitalized competitors’ infrastructure investments, it has been unable to establish a clear value proposition and attract new customers.
  • End of A Long Process Adds to 2016 Tech M&A Total: Rackspace initially hired Morgan Stanley in 2014 to explore strategic options, and in the same year activist investor Blue Harbour Group disclosed a meaningful stake in the company (now totaling more than 9 percent). In closing, the deal joins several other big acquisitions so far this year, with the technology sector accounting for more than $400 billion or one fifth of overall deal flow.
For more information about this transaction, click here to read the press release.
martinwolf was not the advisor in this transaction.
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