Cisco to buy Rackspace?
Below is an interesting article from the TheStreet.com, putting out an idea that Cisco might be in the market to buy Rackspace.
This could have some serious and interesting ramifications in the IT World, as this would unify Cisco’s customer base with the very loyal group of Rackspace users. Not only would this increase Cisco’s footprint, but put them in Top 3 – competing directly with Amazon (EC2) and Microsoft (Azure) as an IaaS provider.
How does this affect you? Would you switch to a Cisco environment from one of the Big 2? What does this mean my Rackspace Cloud Computing Cert?
Cisco Buying Rackspace Would Boost Both Companies
07/08/14 – 06:30 AM EDT
NEW YORK (TheStreet) — At the end of its most recent quarter, Cisco (CSCO) had $50 billion in cash on the balance sheet and another $13 billion in operating cash flow. So there’s very little that the networking giant can’t afford. But the company has struggled with growth.
That, however, has not stopped investors from wondering “what if?” With the stock closing Monday at $25.23, shares are now up roughly 13% on the year to date.
Although growth has come in limited supply, Cisco’s cash position and its strong 3.10% yield makes it tough to overlook the stock. For this reason, and the renewed confidence of investors, Cisco can’t afford to pass up on an opportunity to grow its cloud presence. A deal for Rackspace Hostings (RAX) is what the doctors orders for Cisco’s future and its stock.
Cisco has the cash and Rackspace is motivated to sell. Back in May, Rackspace management disclosed it has fielded M&A overtures from several companies. Some of which also expressed a desire to form strategic partnerships.
I can only speculate on which companies these might have been. Calls and emails to Rackspace representatives were not immediately returned.
While Rackspace does have a strong base of customers willing to shell out the cash it needs to grow its business its high-end outsourced cloud service model, competition from the likes of Amazon (AMZN), Google (GOOG) and VMware (VMW) (among others) are making it tough for Rackspace to compete.
This, however, legitimizes Rackspace’s business model and lends credence to why it is an attractive target. With its market cap right around $5 billion and its $71 million debt, Cisco only needs to shell out $7.5 billion (50% premium) to get this deal done. Essentially, for less than 12% of Cisco’s combined cash and operating cash flow, Cisco would instantly become a feared cloud rival to Amazon, Google and IBM (IBM).
What we’ve come to know as “the cloud” is evolving. OpenStack is the new battleground. It is the term used to describe a worldwide collaboration of developers and cloud-computing experts who are working together on an open-source platform. The goal is to advance the public and private clouds.
The problem is that OpenStack has become a misunderstood buzzword, which is now being redefined by several companies that had no cloud presence until it became a popular thing to claim. Except very few are able to deliver to market scalable cloud solutions that are feature-rich, yet easy to implement.
No one understands this better than Red Hat (RHT). This, of course, is according to Red Hat’s CEO Jim Whitehurst. He’s already called “game — set — match.” His company is the champion, as far as he’s concerned. Given Red Hat’s long history with Linux and Open Source technology, Whitehurst shouldn’t be doubted.
Cisco, meanwhile, doesn’t have a comprehensive OpenStack strategy to complement its software-defined networking initiative. This is why a deal for Rackspace, which, along with NASA, founded the original OpenStack concept in 2010, makes sense.
What’s more, despite the heightened competitive threats, Rackspace is still growing revenue at around 16% year over year. Equally impressive is the company’s average monthly revenue per server is still trending up, which Cisco can leverage for upselling opportunities. Despite the strong sales, however, Rackspace’s profits plummeted 37% due to pricing pressure.
Rackspace set the bar pretty high when it was the only name in the game. Over the next couple of quarters, it’s going to have a tough time beating its year-over-year numbers, especially since larger software names likes IBM, Microsoft (MSFT) and Oracle (ORCL) have developed and/or acquired their own OpenStack capabilities.