Cloud Hosting

By Will Robinson and Danielle Kucera - 2012-06-20T02:58:37Z

Rackspace Hosting Inc. (RAX) is tempting buyers that covet a foothold in the cloud to tackle the largest U.S. Internet takeover since the dot-com bubble.

Rackspace has more than tripled since its 2008 initial public offering as it evolved into Amazon.com Inc. (AMZN)s biggest competitor in cloud computing, which allows businesses to save money on data centers by storing information on remote servers and accessing it via the Web. While the $6.1 billion company has a higher valuation relative to earnings than almost two-thirds of Internet software and e-commerce firms, its less than half as expensive as Amazon, according to data compiled by Bloomberg.

Even after profit failed to top analysts estimates for the first time in four quarters, the company is still projected to almost triple net income by 2014 as the market for cloud- computing infrastructure services expands to $10.5 billion from $3.7 billion last year, according to Gartner Inc. Benchmark Co. says that may lure AT&T Inc. (T), International Business Machines Corp. or Dell Inc. (DELL) An acquisition may fetch as much as 13 times estimated 2013 earnings, said Dougherty & Co., valuing the San Antonio-based company at $7.9 billion for the biggest takeover of a U.S. Internet company in 12 years, the data show.

There truly isnt anyone else out there thats independent and as big as Rackspace in cloud infrastructure, Clayton Moran, a Delray Beach, Florida-based analyst at Benchmark, said in a telephone interview. Theres good value here given the strong growth. Potential acquirers are pretty deep-pocketed so they certainly could pay a healthy multiple.

We think this is a paradigm shift in computing and the future is huge for the winners in this space, Lew Moorman, president of Rackspace, said in an interview yesterday. We want to build something great. Our board has fiduciary duties, but were not for sale.

Rackspace lets its more than 180,000 business customers store their websites and applications on its servers. The fleet of data centers it runs competes with Amazon Web Services in the public-cloud market, where customers rent computing power, storage and other services.

Rackspace is moving its cloud services to OpenStack, an open-source project that it created as an alternative to Seattle-based Amazons product. OpenStack lets companies build their own clouds using Rackspaces code. The effort has the backing of the U.S. space agency NASA, and its being used by companies such as Dell and AT&T, whose offerings compete with Rackspaces.

Competition in the market is still heating up. Amazons cloud business may have reaped $800 million in revenue last year, Heather Bellini, a New York-based analyst at Goldman Sachs Group Inc., estimated in a February report. Microsoft Corp. (MSFT) is promoting its Azure services, while traditional technology providers IBM and Hewlett-Packard Co. (HPQ) are also in the market.

Rackspace increased revenue at its cloud unit by 88 percent last year to $189.2 million. The company has gained share with its early entry into the market and has maintained it by charging a premium for service, said Mark Kelleher, a Boston- based analyst at Dougherty.

Read the rest here:
Amazon Rival Rackspace Evokes Dot-Com Era Deal: Real M&A