Rackspace Hires Morgan Stanley to Evaluate Acquisition or Partnership

Rackspace Hosting, one of the last major U.S. cloud infrastructure service providers that have not been swallowed by giants, is getting serious about a partnership with a bigger player or an outright acquisition.

The Windcrest, Texas-based company has hired Morgan Stanley to evaluate a number of proposals it has received. “In recent months, Rackspace has been approached by multiple parties who have expressed interest in exploring a strategic relationship with Rackspace, ranging from partnership to acquisition,” Rackspace representatives wrote in a filing with the U.S. Securities and Exchange Commission Thursday.

Morgan Stanley is on board to look at the existing proposals as well as other alternatives for advancing the company’s strategy.

Rackspace spokesman did not provide any comment beyond the statements included in the filing. The company said it would not talk about this process publicly until its board made a decision on a specific partnership or transaction.

Stock Shoots Up After Announcement

The stock market welcomed the news by the company whose shares have been on a steady decline for the past 1.5 years. Rackspace’s stock was trading at about $80 per share at one point during the first quarter of last year, but lately, the company has been having a hard time reaching even half that amount.

After trading at close to $28 per share for most of the day Thursday, Rackspace’s stock shot up to more than $32 per share following the announcement.

Differentiating From Giants

The provider’s executives spent the bulk of the time allotted for their earnings call earlier this week talking about how different the company was from the cloud infrastructure services giants and how different its target market was from theirs.

They focused so much on differentiation messaging because the said giants, namely Google, Amazon and Microsoft, had all dramatically slashed prices of their cloud services in March. Google cut Infrastructure-as-a-Service rates by 30 percent to 85 percent, depending on the kind of service. Amazon and Microsoft both followed almost immediately with announcements of cuts similar in magnitude.

Those announcements left many wondering how they were going to affect players like Rackspace. Amazon, Google and Microsoft all have large businesses outside of IaaS offerings, while for a company like Rackspace, IaaS is core.

On the earnings call, Rackspace CEO Graham Weston said the giants’ price cuts would not have as much of an effect as many would think, since Rackspace was after a different customer base. The big players cater to developers who want raw compute and storage resources deployed in the cloud, while Rackspace is after companies who choose to outsource cloud infrastructure deployment and management to an outside expert.

The Real Competition

Rackspace has other giants to compete with, however: giants who have bought up companies it used to compete with toe-to-toe.  They include Verizon, which bought Terremark, CenturyLink, which bought Savvis, and IBM, which now owns SoftLayer.

Those are the companies Rackspace sees as its direct competition, its president Taylor Rhodes said on the earnings call this week.

Being acquired by or entering into a tight partnership with a company of similar caliber would give Rackspace more fire power to compete with those firms. The data center footprint it has built out and the technology those data centers house are far from trivial.

Rackspace engineers were on the original team that created OpenStack, the open source cloud infrastructure software that has since become the de facto standard cloud architecture alternative to proprietary clouds from the likes of Amazon. Rackspace reportedly has the largest production deployment of OpenStack in the world.

The company operates nine data centers in six markets, including Chicago, Dallas-Fort Worth, northern Virginia, London, Hong Kong and Sydney. Those facilities house more than 100,000 servers.