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Comment by jdpedrie | Hacker News Reader

Has there been any analysis on the upswing in acquisitions of cloud computing and storage companies? First EMC gets bought by Dell, now Rackspace is getting picked up. Is it just in response to growth on the part of Google and Amazon?

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Apollo is a private equity firm, so they are most likely acquiring Rackspace because they see fat they can trim (read: laying people off, outsourcing labor, tax optimization) off a decently competitive company that they can possibly take public or sell in 5-10 years.

It's not so much about competing with Amazon, Google, etc. or advancing the state of the technology as much as making a bet that the brand is currently undervalued and that conditions in the cloud computing market will allow for a profitable exit in the medium term.

For examples of Apollo bets that have gone wrong see its LBO of Harrah's (basically bankrupt) or Linens 'n Things (bankrupt).

(Disclaimer: former employee of Rackspace) That is exactly how I read it. While Rackspace has been doing pretty well, its just not growing as fast as its competition and Wall Street in concerned.

It is a big shame though. Rackspace is one of the few Texas-born companies that managed to strike it big and still have a very egalitarian culture. They have a very interesting culture and I wish it was something that could go on; a lot of my former coworkers absolutely love that environment. But it doesn't look like it will last for much longer.

For a successful LBO, growth is largely irrelevant. What is relevant however, is that you can protect your existing market share. If you can buy a company for $1bn with $800m in debt and pay that down, and sell it for $1bn again 5 or 10 years down the line, you just made a cool $800m. If you can double the net profit, you'll be able to sell it for $2bn, etc.

They've done amazing things for the community. I can only hope that Apollo group continues the local outreach!

I hope that fat doesn't include their free accounts for OSS projects and communities, that'd be sad.

The Dell/EMC purchase may have been just to buy and then sell VMware, which EMC owned. If I recall correctly, EMC and VMware had both lost meaningful value after uniting and it was commonly held that VMWare was worth much more, so Dell is likely try to rip those two apart, pump VMware back up, sell it at a profit on the whole EMC purchase, and keep the EMC assets as gravy.

One sign of this occurring is the aggressive layoffs VMWare initiated of its cost centres (e.g. in support) soon after the purchase.

I agree with your speculation; it seems likely, however, I don't understand why laying off staff at VMware would help make the company stronger - is it just supposed to make the balance sheet look good in the short term?

Short-term results oriented layoffs like this decimated HP under Carly Fiorina, and I don't have a good long-term outlook on VMware, if Dell decides to take a similar approach.

My understanding is that it is purely to improve the short term outlook on paper.

I agree that it does not seem wise for the actual health of the entity.

All of the above.

AWS (AMZN's public cloud reporting segment):

  FY15 Revenues: $7.8 billion 
  CAGR (FY13-FY15): 59% 
  FY15 Op Margin: 23%

RAX:

  FY15 Revenues: $2.0 billion
  CAGR (FY13-FY15): 14%
  FY15 Op Margin: 10%

They're targeting different segments on different business requirements. Their numbers will never be comparable.

RAX's strategy has shifted to "different segments" directly as a result of competition from AWS [0]. Now, AMZN has considerable supplier power over RAX:

  "The deal would have been unthinkable just two years ago, 
  when Rackspace and AWS were fierce rivals. But in early 2014, 
  Rackspace, facing ever slimmer margins amid a cloud-computing price war, 
  withdrew from head-to-head competition with Amazon. Since then, 
  it has focused on offering higher-margin services."

[0] http://www.wsj.com/articles/rackspace-teams-up-with-amazon-1...

Yes but even prior to this, Rackspace had been a managed cloud provider, meaning they offer services on top of the infrastructure. This is different than AWS.

RAX has its roots in managed cloud, but they moved away from that. They got into IaaS, but have retrenched. Here's RAX's mapping of AWS to RAX P&S for IaaS [0]. That's a lot. RAX has decided to return to its roots (managed cloud) and seek differentiation because it can't compete on IaaS.[1] That'll be tough.

RAX's going private to shift its P&S mix and turn things around.

edit: I'll also point to jsode's great comment above.

[0] https://support.rackspace.com/how-to/mapping-of-amazon-web-s...

[1] http://www.networkworld.com/article/2461361/iaas/rackspace-b...

Rackspace's IaaS offering was never close to what AWS, Azure or even GCE offer.

It was more similar to DigitalOcean or Vultr, who are not really IaaS but VPS providers. I mean, where are the VPCs? the incredibly redundant load balancing? the VPN gateways, etc?

Disclaimer: It has been 2 years since I evaluated RAX's offerings.

Rackspace offers most of the services Amazon/Google/Microsoft does - but you're right, they did start out as Slicehost which is a Linode competitor (back in what...2009?)

Isn't 'managed cloud' kind of contradictory?

Shouldn't your cloud based application manage itself? That's kind of the point, not having to 'manage' it?

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