Cisco Systems has never been shy about buying a company if executives think the deal will add to the vendor's wide range of ambitions, from security and cloud to the data center and Internet of everything. However, despite speculation in the industry, cloud provider Rackspace isn't going to be one of those acquisitions.
Rackspace has been a pioneer in the cloud computing market and a key developer of the OpenStack technology, and it competes with such large and well-financed companies as Amazon Web Services and Google. However, as the competition has increased, Rackspace has seen its stock price fall by almost half over the past year, and in a filing with the Securities and Exchange Commission (SEC) earlier this month, Rackspace officials said the company has hired banker Morgan Stanley to help them explore possible partnerships or sales.
"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," they said in the SEC document.
The company's board of directors has made no decisions or set a timetable for the making one, they said.
The filing kicked off a round of speculation over what company may step up to buy Rackspace, and one name batted about was Cisco. The networking vendor has been moving aggressively into the increasingly competitive cloud space and in January introduced its Intercloud initiative, a vision of interconnected cloud environments linked by Cisco technology through which Cisco and other vendors would deliver applications and services.
Soon after, Cisco officials said the company will invest $1 billion over the next two years to build out that vision, and during the Cisco Live 2014 event this week, the company expanded its cloud partnership roster and executive team.
In a May 20 column on The Street Website, Richard Saintvilus, a stock analyst and founder and CEO of WallStPlaybook.com, said buying Rackspace would make sense for Cisco, which has $50 billion in cash and needs to reinvigorate the company. Rackspace shares have been growing since earlier this month, it reported decent first-quarter financial numbers, and it has talked about customer growth, Saintvilus wrote.
"If Cisco is paying attention, it has to consider Rackspace to further its own cloud ambitions to return growth back to the company," he wrote.
However, Cisco CEO John Chambers and other company officials reportedly put that idea to rest during Cisco Live. According to reports, during a meeting with journalists, Chambers said Rackspace "doesn't fit into our normal sweet spot and core competency area. … This is a market that is very, very price-sensitive that's taking on the big giants in Google and Facebook and Amazon and Microsoft, etc."
Cisco doesn't move into new markets unless there's a good chance that it can capture at least 40 percent of it, he said.
The competition in the cloud space is fierce. In a May 12 conference call with analysts and journalists to discuss first-quarter earnings, Rackspace co-founder Graham Weston—who took over as CEO in February after Lanham Napier retired—tried to differentiate what Rackspace does in managed cloud services from other vendors.
"At the end of March, Amazon, Google and Microsoft, the unmanaged cloud providers, sharply cut unit prices for access to cloud infrastructure," Weston said. "This attracted a ton of publicity within our industry, but it's important to remember that this is just the latest iteration of a long-standing trend for those players who sell raw computing capacity, a service that only covers a fraction of the real cost of transitioning, running and scaling on the cloud. Rackspace's strategy is to be the leader of the managed cloud category, the higher value alternative to the unmanaged cloud approach. We will continue to differentiate through 'fanatical support' and by providing a customer experience that … the unmanaged cloud vendors do not provide."
However, at least one analyst on the call questioned whether Rackspace has been successful in getting its message out into the industry.