The entrance to Rackspace. Photo by Scott Ball.
Rackspace is acquiring Massachusetts-based enterprise applications company TriCore Solutions. Credit: Scott Ball/San Antonio Report

San Antonio-based Rackspace is being acquired for $4.3 billion, or $32 a share, by Apollo Global Management and affiliate investors and being taken private in a deal that will keep the company and its management team in San Antonio, according to a joint announcement made Friday morning.

Rackspace shares, which traded at $23 when speculation about a sale to Apollo leaked in early August, closed at $30.19 Thursday. The $32 per share valuation gives shareholders a 38% premium.

Click here to read the press release.

The deal is expected to close in the fourth quarter this year. Rackspace’s board of directors has unanimously approved the deal and have recommended that shareholders vote in favor of the transaction.

Once the deal closes, Rackspace Co-Founder and Chairman Graham Weston and other directors will step down as the board is dissolved. Apollo and its affiliate investors, including Searchlight Capital Partners, will appoint a new board of directors which could include Weston or others currently associated with Rackspace.

Rackspace CEO Taylor Rhodes and his team are expected to continue in place once the company begins to operate privately in late 2016. Rackspace’s global operations, including its operations in London, also are expected to continue in place.

The $32 per share cash consideration represents a premium of 38% when compared to Rackspace’s unaffected closing stock price on Aug. 3, 2016, the last trading day prior to sale.

Graham Weston, chairman and CEO of Rackspace, poses for a photo during a press conference addressing the business case for immigration reform. Photo by Iris Dimmick.
Rackspace Co-Founder and Chairman Graham Weston. Photo by Iris Dimmick.

“This transaction is the result of diligent analysis and thoughtful strategic deliberations by our board over many months,” Weston stated in the official release. “Our board, with the assistance of independent advisors, determined that this transaction, upon closing, will deliver immediate, significant and certain cash value to our stockholders. We are also excited that this transaction will provide Rackspace with more flexibility to manage the business for long-term growth and enhance our product offerings. We are confident that as a private company, Rackspace will be best positioned to capitalize on our early leadership of the fast-growing managed cloud services industry.”

People familiar with Rackspace’s legacy business and its newer enterprises, notably its deal with Amazon Web Services, say taking the company private will allow Rackspace to operate free of the quarterly reporting cycles that drive publicly-traded companies, freeing up resources to accelerate growth of its newer businesses and pursue complementary acquisitions.

Rackspace CEO Taylor Rhodes.
Rackspace CEO Taylor Rhodes.

Rhodes commented: “We are presented with a significant opportunity today as mainstream companies move their computing out of corporate data centers and into multi-cloud models. Apollo and its partners take a patient, value-oriented approach to their funds’ investments, and value Rackspace’s strategy and unique culture. This is an exciting transaction for Rackspace and we look forward to working closely together.”

Executives with Rackspace and Apollo hit it off early in the negotiations, according to one source not involved in the transaction, who said their shared values and commitment to long-term growth made the deal mutually attractive.

“We are tremendously excited about the opportunity for our managed funds to acquire Rackspace,” said David Sambur, Partner at Apollo. “We have great respect for the company’s talented employees and their commitment to deliver expertise and exceptional service for the world’s leading cloud platforms. We look forward to working with Taylor and the entire management team and Searchlight to help advance Rackspace’s strategy and continue the company’s strong heritage of innovation.”

In a lengthy blog post titled, “Why Rackspace is Becoming a Private Company” that appeared  on the Rackspace website Friday morning, CEO Rhodes stated that terms of the deal give Rackspace greater flexibility to serve its customer base and grow while maintaining its base of operations in San Antonio:

“We expect that operating as a private company will enable us to strengthen the value we deliver to customers, and build on the pride that we’ve always taken when we help them succeed. Over the long term, we expect to be able to create more opportunities for Rackers than we would under any of the other available options. We will continue to offer competitive compensation and benefits, and one of the world’s most engaging workplace cultures.

“Until this transaction closes, which we expect to occur in the fourth quarter of 2016, Rackspace will remain a public company. Before and after closing, our customers and partners will still be customers and partners of Rackspace. We will keep our company name and will continue to be headquartered in San Antonio.”

Local civic leaders greeted the news with enthusiasm.

Mayor Ivy Taylor addresses the crowd with news on ride share. Photo by Scott Ball.
Mayor Ivy Taylor addresses the crowd with news on rideshare during a Tech Bloc rally in August 2015. Photo by Scott Ball. Credit: Scott Ball / San Antonio Report

“Rackspace has been a leader in our local (tech) sector,” said Mayor Ivy Taylor. “We have to be  prepared for these kinds of changes. The nature of these industries are changing so fast. I’m just pleased they’ll still have a footprint and headquarters here in San Antonio because they’ve been such an asset to our community and we look forward to that continuing.”

The company has vigorously participated in a Big Brothers Big Sisters South Texas workplace mentorship program, employees volunteer for payroll deductions that feed the Rackspace Foundation, and it has a robust community service program called Rack Gives Back.

(Read More: Rackspace Mentorship Program Builds Community Bridges)

The leadership team that remains at the helm of Rackspace should continue those efforts, Taylor said, and make sure the owners see the value of connecting with the community.

“We had a great opportunity in the early ’80s when Datapoint was here and then we lost our momentum and our place in the emerging tech economy, and then Rackspace was developed and led the way to what is now a stronger, more diversified tech community,” said Bexar County Judge Nelson Wolff. “We are in a much better position to support the company here today, and hopefully the equity partners see that and will allow Rackspace to continue to grow here.”

San Antonio EDF President & CEO Jenna Saucedo-Herrera. Photo courtesy of SAEDF.
San Antonio EDF President & CEO Jenna Saucedo-Herrera. Photo courtesy of SAEDF.

“The decision by Apollo Global Management to maintain Rackspace’s headquarters in San Antonio is a testament to the momentum our community is building in the tech sector,” said Jenna Saucedo-Herrera, president and CEO of the San Antonio Economic Development Foundation. “As a private company, Rackspace will have the opportunity to accelerate the development of new products and technologies that will stimulate their continued growth and expansion, as well as give birth to new companies that can further diversify San Antonio’s tech ecosystem.”

More about Rackspace

Founders: Richard Yoo, Pat Condon, Dirk Elmendorf, Morris Miller and Graham Weston.

Weston and a partner provided original capital to start Rackspace. Weston joined the enterprise as CEO, remained in that position until 2006, then became chairman of the board.

Today: More than 6,000 employees

Offices: San Antonio, Austin, San Francisco, Australia, the United Kingdom, Switzerland, Israel, The Netherlands, India, and Hong Kong 

Data centersTexas, Illinois, Virginia, the United Kingdom, Australia, and Hong Kong 

Email and apps division operates from Blacksburg, Va.

1998: Three Trinity University classmates (Yoo, Codon, Elmendorf) found rackspace.com and launch the first Linux managed hosting products. Rackspace is launched in October 1998 with Yoo as CEO.

1999: VP of Customer Care David Bryce coins the term “Fanatical Support” to encapsulate our customer service philosophy.

2001: Rackspace presents the first Fanatical Jacket Award – a literal straightjacket – to a Racker who provides outstanding customer service.

2006: Rackspace develops six core values to embody its culture and commitment to being one of the world’s greatest service companies.

2007:  Fortune’s 100 Best Companies to Work for first recognizes Rackspace’s ways of attracting top talent to serve customer better. (Rackspace is included five more times over the next six years.) Taylor Rhodes joins Rackspace.

2008: Mosso launches Cloud Files and (in collaboration with Slicehost) Cloud Servers. These products are rebranded as The Rackspace Cloud; Rackspace founds OpenStack®, the open-source cloud platform, with NASA. 

Aug. 8, 2008: Rackspace goes public, opens for trading on the New York Stock Exchange under the ticker symbol “RAX” after its initial public offering (IPO) in which it raised $187.5 million.

2009: Rackspace launches next-generation public cloud platform on OpenStack. This allows customers to enjoy Fanatical Support while building apps and sites on a cloud based on open standards.

Sept. 8, 2010: Rackspace drops its client Dove World Outreach Center, because their pastor Terry Jones said he would burn several copies of the Qu’ran on the anniversary of 9/11. Rackspace claimed that this violated their company policy.

May 15, 2014: Rackspace hires Morgan Stanley to evaluate strategic options including selling to or merging with other technology companies.

Aug. 3, 2016: The first news reports appear of a possible deal between Rackspace and Apollo, sparking a spike in the stock value.

Aug. 26, 2016: Rackspace and Apollo announce the $4.3 billion deal to take the #1 managed cloud company private.

Disclosure: Lew Moorman, former Rackspace president and current member of the board of directors, and Dan Goodgame, vice president for corporate communications at Rackspace, both serve as board members of the Rivard Report.

https://rivardreport.wildapricot.org

Top image: An entryway inside Rackspace headquarters.  Photo by Scott Ball. 

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Robert Rivard

Robert Rivard

Robert Rivard is editor and publisher of the San Antonio Report.