Succumbing to Amazonian cloud rivals, Rackspace goes private

Rackspace Hosting failed to keep pace with cheaper and broader offerings from Amazon

Low online prices and convenience offered by Amazon.com usually hammers rival retailers. Now it's happening in the world of corporate IT services.

Apollo Global Management is buying Rackspace Hosting for $4.3 billion after the cloud-services company failed to keep pace with cheaper and broader offerings from Amazon, and other large technology companies like Microsoft and Google.

The New York-based private equity firm agreed to pay $32 a share in cash for Rackspace, according to a statement Friday.

For Rackspace, the deal marks the end of its public struggle against bigger cloud rivals that offered lower-cost computing power, storage and other IT services over the internet, crimping its ability to compete. Rackspace recently started helping companies shift their IT operations to data centres run by Amazon and Microsoft, but it wasn't enough to make up for declines in its traditional businesses. Becoming a private company will give Rackspace time and space to complete the transition to a services business.

Rackspace is "gaining traction, but they're very small," said Joshua Yatskowitz, a Bloomberg Intelligence analyst. "Bringing it out of the public eye can make that transition a lot easier."

Rackspace went public in 2008 and was a high-flying growth company for several years, benefiting from the early shift by companies to running work software on rented computer servers over the internet, rather than their own on-premise data centres.

But the rise of Amazon Web Services, the online retailer's cloud business, helped end that run in 2013. Early that year, AWS cut prices for its cloud offerings seven times. Rackspace's results and forecasts missed analysts' estimates and its shares plunged as AWS gained market share.

In 2014, the company hired Morgan Stanley to seek strategic options that could have included teaming up with bigger technology companies. That decision came amid fresh price cuts. Google, which was also trying to catch up with AWS, slashed prices on some of its cloud-computing services by up to 85 per cent in March 2014. Amazon followed with more price cuts the next day, triggering a price war that continues today.