In Going Private, Rackspace Will Do Things Not Possible as Public Company, CTO Says

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If you look at the core industries in which New York private equity firm Apollo Global Management invests in, you’ll notice one area missing from that list: technology. That could change, however, as Apollo announced on Friday that it has acquired San Antonio-based Rackspace for $4.3 billion, or around $32 per share in cash.

So why would a firm who has invested in everything from cruise lines to Twinkies want to buy Rackspace?

engatesAccording to Rackspace CTO John Engates, Apollo sees a huge opportunity in the investments Rackspace has already made in cloud services, and an even bigger opportunity in those that it could make by going private.

“They think if we continue down this path in private cloud, managed cloud for Amazon Web Services, and Microsoft Azure, and some of the work we’ve been doing around security; they think those are the right moves,” Engates tells The WHIR in an interview on Friday. “There’s a huge opportunity in the transition from on-premises data centers to the cloud. There are lots and lots of workloads still sitting in private data centers or corporate data centers that need to get to the cloud in some form or fashion so I think that’s what they’re also excited about and want to invest in.”

Earlier this month rumors resurfaced that Rackspace was exploring private equity. The company, which traded on the New York Stock Exchange under the ticker symbol RAX since going public in 2008, had explored the option two years ago with Morgan Stanley.

That never materialized, and the company shifted gears, focusing on adding managed services – including support, which it dubs Fanatical Support – for some of the fastest growing public clouds on the market, including Amazon Web Services (AWS) and Microsoft Azure.

“We think that the timing is right generally because there’s so much change going on in the market right now around cloud and the need for companies to get the cloud, or start or accelerate on the journey of cloud,” Engates says. “Those conditions are better than ever I think because if you look out into the market to see who is doing what, Amazon is doing great, Microsoft is making a huge transition and doing great, other companies like Google are in the market…there’s lots of opportunity because every day we talk to customers who tell us they need the help.”

Gartner predicts that multi-cloud strategies will be the norm for the majority of enterprises over the next few years. By 2019, 80 percent of enterprises will employ a strategy that includes multiple IaaS and PaaS providers, compared to just 10 percent in 2015. This multi-cloud world will give way to companies like Rackspace who help customers make sense of – and secure – it all.

“They will help us invest more aggressively in those high-growth businesses and they want us to be the multi-cloud provider of choice in the market,” Engates says. “This will also include strengthening our dedicated hosting and our hybrid cloud business, and really more importantly putting some effort in our sales and marketing engine. One of the things that we sometimes find ourselves faced with is customers or prospects don’t always know what Rackspace does or is in today’s terms, I think they still look at us and think of Rackspace of yesteryear.”

“Rackspace is radically different than we were even a few years ago. I think we have to go out to the market to tell that story, and I think they see that opportunity and want to help us with that,” he says.

The deal is slated to close in the fourth quarter of 2016, subject to regulatory approvals, and Rackspace president and CEO Taylor Rhodes is set to stay on.

“He really is the person they believe can lead the future of the company,” Engates says about Rhodes, who took over as Rackspace CEO in 2014.

Engates reiterates that the deal will mean great things for customers, echoing Rhodes’ comments in a blog post this morning where he said that going private with Apollo will “strengthen the value [it] delivers to customers.”

“We’re doing all the right things for the customers, we’re taking care of customers, this is not about de-investing in the things that we do,” Engates says. “This is an opportunity for us to do more, invest more, and do things that might not have been possible under the scrutiny of the public market.”

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