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Philbert Shih on Amazon’s potential investment in Rackspace

  • August 18, 2020

Source: San Antonio Express News

Report: Amazon looks to acquire stake in San Antonio’s Rackspace Technology

Amazon wants a piece of San Antonio cloud-computing company Rackspace Technology Inc., according to a published report.

The online retail giant is in talks to acquire a minority stake in Rackspace, Reuters reported early Monday, citing unnamed sources. News of the discussions came less than two weeks after Rackspace raised $703 million from its initial public offering on the Nasdaq Global Select Market.

“I didn’t think that development is overly surprising given the kind of interest Amazon might have in what Rackspace is doing in relation to its cloud platform,” said Philbert Shih, managing director of Toronto-based Structure Research, a consulting firm that analyzes the internet infrastructure market. “It’s a validation of the demand for managed services and support on top of cloud infrastructure.”

While it’s unclear if or when a deal will come to fruition, Shih said the development shows Amazon values Rackspace’s cloud capabilities.

“Amazon has said with this potential move that, ‘Hey, there is a ton of value in what Rackspace does supporting our customers, assisting our customers and driving additional value add for our customers,’” he said. “Running this kind of global cloud infrastructure takes immense resources and dollars.”

According to Shih, the managed third-party cloud model — which Rackspace specializes in — has vast growth potential.

Rackspace, headquartered at the former Windsor Park Mall in Windcrest, currently carries more than $4 billion in debt and employs more than 6,000 on four continents. It also carried more than $4 billion in debt as of July and had weathered more than three years of losses as it acquired and integrated four companies.

New York-based private equity firm Apollo Global Management owns a majority of Rackspace shares.

Rackspace, which Apollo took private in a deal valued at $4.3 billion in 2016, returned to the stock market on Aug. 5, with an opening share price of $21. Its shares dropped from there, hitting a low of $15.25 a couple days after the IPO.

The Amazon news gave Rackspace’s stock a jolt. Trading under the ticker “RXT,” the stocked ended Monday at $18.31, up more than 10 percent from Friday’s closing price.

Shih said Rackspace is largely the same business it was when it first went public in 2008, but with more experience and a different focus that will take investors some time to fully understand.

“Now it’s advanced services for a third-party cloud — somebody else’s platform,” he said. “It’s not necessarily a kind of early-stage business, it’s now more of a mature business with certain legacy customers and revenues that it didn’t have before.”

This potential investment is the latest development in the relationship between Rackspace and Amazon.

On July 8, Rackspace said it was bolstering its partnership with Amazon Web Services Inc, the retailer’s cloud services subsidiary, with a strategic collaboration agreement.

“Rackspace Technology has demonstrated a strong commitment to customers, and we look forward to continuing to work with them to bring innovative solutions to market,” Doug Yeum of Amazon Web Services said in a news release.

Amazon, Apollo and Rackspace did not respond to requests for comment.

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