Rackspace Hosting, Inc. (NYSE:RAX) shares jumped a bit today after a rumor that Hewlett-Packard Company (NYSE:HPQ) was thinking about buying it. However, Re/code reports that the rumor isn’t true, according to its sources.
HP still not interested in Rackspace
Re/code reported last month that Hewlett-Packard didn’t want Rackspace, and the website’s sources said nothing on this topic has changed since then. The reason Wall Street worked itself into a frenzy is because last night with the company’s earnings report and conference call, Hewlett-Packard CEO Meg Whitman said they will continue making acquisitions going forward. On its own, this isn’t exactly new in formation. HP has made acquisitions before, and she was simply saying that they will continue doing so.
At this year's annual Robin Hood conference, which was held virtually, the founder of the world's largest hedge fund, Ray Dalio, talked about asset bubbles and how investors could detect as well as deal with bubbles in the marketplace. Q1 2021 hedge fund letters, conferences and more Dalio believes that by studying past market cycles Read More
And then there was a comment from HP Chief Financial Officer Cathie Lesjak. She was talking about why the company repurchased only about half as many shares in the third quarter as it did in previous quarters. The executive said they were “limited” in their ability to buy back more shares in the quarter because of “material non-public information.”
Now how those two comments leads us to the assumption that HP wants to buy Rackspace specifically is beyond me. Certainly that detail about “material non-public information” is interesting, but it doesn’t necessarily point to Rackspace—in fact, according to Re/code’s sources, it has nothing to do with Rackspace.
Where did the Rackspace speculations come from?
So why did investors jump to such a conclusion? Many have assumed that since HP rival International Business Machines Corp. (NYSE:IBM) bought cloud services provider SoftLayer last year for approximately $2 billion, HP needs to buy a cloud company. After all, IBM has given SoftLayer a big boost, even boasting that its global cloud is larger than Amazon.com, Inc. (NASDAQ:AMZN)’s Web Services.
Meanwhile Hewlett-Packard continues to fall further and further behind in the cloud, watching its enterprise hardware business shrink as cloud services take over. And this is where Rackspace comes in because Rackspace has been looking for a buyer for the last few months, although so far, no company has expressed interest. So investors may see a Rackspace – HP combination as being a match made in heaven.
Would Rackspace be a good deal?
However, Re/code’s Arik Hesseldahl says, “Wait just a minute.” He points out that Rackspace isn’t really that profitable, particularly for a company that has a market capitalization of approximately $5 billion. With a premium, the purchase price could end up being over $6 billion—for a company he says isn’t very profitable “for a cloud services player.” Rackspace’s gross margins have been around 67% over the last few years, but some estimate that Amazon Web Services has margins that are closer to 90%.
Hesseldahl also suggests that Rackspace doesn’t really have anything Hewlett-Packard could build on its own anyway. He adds that HP could simply base a cloud operating system on its OpenStack cloud operating system, using its own hardware as well. Problem solved.