Is the acquisition of Rackspace AT&T's last chance to catch the cloud train?

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Last week, Tiffany Lathe, Vice President and General Council of Rackspace announced that Rackspace is hiring Morgan Stanley to evaluate multiple inbound offers for acquisition:

 „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.Our board decided to hire Morgan Stanley to evaluate the inbound strategic proposals and to explore other alternatives which could advance Rackspace’s long-term strategy.“

 

Market immediately started to speculate about possible acquirers, AT&T, HP, EMC, Cisco and IBM are among the most prominent suspects. Rackspace, who stores data and manages software for enterprises on remote servers, differentiated itself from competitors, Google or Amazon, by keeping higher prices of its services, while providing superb customer experience to its clients. Combining that with a being second player on the market, just after Amazon's cloud services, it is understandable why Rackspace is now considered as a good acquisition target, by many.

 

Bringing a knife to a gunfight

Cloud computing is highly capital intensive industry and competition in cloud computing service is becoming more and more intensified. Companies as Amazon and Google are investing billions per year for development of new data centers, needed for increasing their global cloud footprint. On the other hand, Rackspace doesn’t come near to such capital resources. Furthermore, potentially big problem for Rackspace is underperformance in acquisition of business customers. Even though they reported growth in latest quarter, analysts are being skeptical about the future ability of the Rackspace in resolving these difficulties.

 

Catching up with the rest of the crowd

One of the potential acquirers is a major telecommunication provider, AT&T, is lagging behind its competitors in the cloud game. Situation where telecom providers the network and cloud company provides end point is becoming increasingly popular and beneficial for both. AT&T’s competitor, CenturyLink has become one of first movers in the cloud market by buying Savvis. Three years ago, Verizon made a strong move in the cloud business by acquiring Terramark. Now, the ball is in the AT&Ts court, and there is no much time.

 

Is there a mutual interest?

That being said, AT&T is in the perfect position to bring, to the table, what Rackspace is missing. Company, as AT&T, has decades of experience handling big capital intensive projects, and that is what Rackspace needs. Furthermore, AT&T has more than enough capital resources to help Rackspace to compete against “the big guys”. Maybe the biggest opportunity lies in the AT&T’s access to the business customers. As a telco company, AT&T has a long, trusting relationship with number of businesses and corporations and this is what Rackspace is missing. By having AT&T beside them, Rackspace could focus on their core business, and leverage AT&T to access those precious corporate clients.  

 

As there are number of other companies fighting for acquisition of Rackspace, AT&T should really consider their future cloud positioning. AT&T could learn a lot about M&A from the Facebook and their Whatsapp deal. Being too shy during negotiation is not worth compromising future positioning of the company. If AT&T has long term intention to be in the cloud market, and they should, they have to consider paying much higher premium on Rackspace current stock price.

 

Do you think that acquisition of Rackspace makes sense for AT&T? Will other players grab Rackspace in front of AT&T's eyes? Tell us what do you think in the comments below