Rackspace Up for Sale. Will Microsoft Make a Bid?

Rackspace, the largest independent cloud hosting provider, said that multiple bidders have expressed interest in acquiring it. As a result, Rackspace has made it official that it's looking to sell. The company has hired the investment bank Morgan Stanley to evaluate proposals and the company's options.

In a filing late Thursday with the SEC, Rackspace revealed the move, saying it has "been approached by multiple parties who have expressed interest in exploring a strategic relationship with Rackspace, ranging from partnership to acquisition." Rackspace's future has been in question since CEO Lanham Napier stepped down in February. At the time, I wondered if Rackspace would put itself on the market. The board said it is looking for a new CEO but the company has yet to name one.

While Rackspace is profitable, it's being squeezed by larger players such as Amazon Web Services, Microsoft and Google. Rackspace these days is best known for stewarding the OpenStack open source cloud compute storage and networking standards -- a move aimed at providing an interoperable cloud and an alternative to market-leader Amazon.

Many key cloud providers support OpenStack including IBM, Hewlett Packard and AT&T, as well as many smaller providers. OpenStack is also working its way into Linux servers, making it the cloud operating system of choice for those users.

But the three largest cloud providers -- Amazon, Microsoft and Google -- don't support OpenStack, though orchestration tools such as Puppet, Chef and numerous other third-party offerings enable some levels of interoperability.

Of course the Rackspace cloud servers and storage are now OpenStack-based. Rackspace made a big strategic bet when it teamed up with NASA over four years ago to contribute to the OpenStack code it codeveloped with the open source community. Making the transition for Rackspace was a big and costly bet and the company's stock is down 50 percent over the past year -- though shares jumped 20 percent this morning on the news. It's ironic that the company made the filing just as the semi-annual OpenStack Summit in Atlanta took place this week.

Rackspace also has a formidable SharePoint and Exchange hosting service. I can't help but ponder if Microsoft is one of the interested parties, as outlandish as that may sound to some. There's good reason to laugh off Microsoft having any interest in Rackspace. The Microsoft Azure cloud service already has 12 global datacenters online and has four more in the queue for this year. Microsoft Azure is part of the Cloud OS, largely based on Windows Server and Hyper-V.

Rackspace, by comparison, runs an open source infrastructure. And even though it supports Windows Server and Hyper-V, it's a whole different platform. On the other hand, several people in the OpenStack Foundation have lauded Microsoft for making meaningful contributions and participating in activities. But if Microsoft wanted to have a companion network of datacenters based on OpenStack, Rackspace would be an interesting play.

To be sure, this would be a surprising and likely disruptive move. Coming back from TechEd this week, Microsoft has made it clear it's going to put all of its resources into Azure. Unless those inside the company see OpenStack as a viable threat to Azure's future as a dominant enterprise public cloud, buying anything but the company's SharePoint and Exchange hosting service would be a major departure for Microsoft.

There are likely other interested parties. IBM reportedly was once seriously interested in Rackspace before acquiring SoftLayer for $2 billion. Perhaps IBM has renewed its interest in Rackspace, though a counterargument is that Big Blue is emphasizing higher margin services-based offerings. Though I have no insights as to which companies have expressed interest, here are some possibilities, other than IBM:

• Hewlett Packard: Like Rackspace, HP has made a major commitment to OpenStack for both its public and private cloud offerings. The company certainly has the resources to build out its own global footprint since it's a major provider of server, storage and network gear. In other words, it doesn't need Rackspace for its footprint but rather its brand and customer base.

• Cisco: Networking giant Cisco, recently announced its $1 billion "Intercloud" effort. It also is a significant contributor in the OpenStack community and perhaps Rackspace could provide the glue for its Intercloud. This doesn't sound like a move CEO John Chambers would make, as he's trying divest groups that aren't core. Given mixed results with WebEx, another service it acquired, picking up Rackspace may not be a natural fit for Cisco.

• Google: Another unlikely player since it has shown no interest in OpenStack but Google has lots of money to spend and it's made more surprising moves in the past. Also if it had misgivings about passing on OpenStack, this would be an easy way to get on board.

• AT&T: Perhaps the large telecommunications giant wants to follow in Verizon's footsteps (it bought Terremark a few years ago).

• Verizon: Even though Verizon has Terremark, like Google, it hasn't jumped on the OpenStack bandwagon.

• VMware/EMC: VMware has not totally given OpenStack a pass (having bought Nicera), but the VMware Hybrid Cloud service is targeting shops with its private virtualization infrastructure.

• Red Hat: Could the open source software company, which claims to be the largest OpenStack contributor, decide to become a service provider too?

• Other possibilities: One can't rule out some other companies with deep pockets (or access to capital) such as SAP, Salesforce.com, Dell and Oracle. But I'd say these are all likely longshots.

To be sure, Rackspace said in its filing that it could also go the partnership route or other alternatives. Rackspace has given no timetable for making any type of move, indicating it was just exploring its options. That said, we all know how these things usually work out.

Posted by Jeffrey Schwartz on 05/16/2014 at 11:52 AM