The Mighty Light of Wall Street

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| Peter Radizeski of RAD-INFO, Inc. talking telecom, Cloud, VoIP, CLEC, and The Channel.

The Mighty Light of Wall Street

Going private has been a thing for the last few years. Avaya did it. Dell did it. PGI did it. Polycom is doing it. Now Rackspace is being bought out by private equity.

Dell and Rackspace had the same reasons for going private - or more accurately, stop being a publicly traded company. The public markets don't take kindly to unknowns, pivots and variables. Dell was going through a transition from selling mainly hardware to buying up software companies like SonicWall, Wyse and Quest. That transition wasn't as painless as expected, so Michael Dell found some people to lend him money - $24 Billion - to go private and get out of the mighty light of Wall Street that is so unforgiving.

This was the largest LBO (leveraged buy-out) in recent years so if you Google "Dell going private case study", you will find many business schools who have examined it, including U of Texas.

With the EMC acquisition announced, Dell sold off Sonicwall + Quest + others to reduce the debt before spending $67B on EMC. Dell will also own VMware and Airwatch with this transaction.

PGI, the global conferencing and collab company, was taken private by Siris Capital for approximately $1 Billion in 4Q2015. Siris Capital was the white knight that is taking Polycom private (and saving Polycom from MITEL).

LBO is not new. It is business as usual with some pretty spectacular failures like RJR Nabisco, Harrah's (casino aka Caesars) and TXU. The thing about leverage is that at some point someone wants their money back.

The good thing about private is exemplified by this: "Taking the second-largest oil producer in Texas private in 2006 was a stroke of genius as it has allowed industry icons Carlyle and Goldman to ride out the drop in oil prices in... well, private." [BusinessInsider]

Apollo Global is taking Rackspace private for $4.3 Billion. Like many of these other deals, it is a 30+% premium over the current stock price. Why is this happening?

Rackspace started as a software development firm, but pivoted to a hosting company, which is still the center of their world today. Hosting blogs and websites slowly morphed into a cloud computing infrastructure (IAAS, PAAS and VPS along with dedicated servers) that was competing directly with Amazon AWS. Even with their trademarked Fanatical Support, competing against AWS - and Azure and Google Compute - is no picnic.

Their software dev roots came out in their support for open software. "In 2010, Rackspace contributed the source code of its Cloud Files product to the OpenStack project under the Apache License to become the OpenStack Object Storage component," according to Wikipedia. "In April 2012, Rackspace announced it would implement OpenStack Compute as the underlying technology for their Cloud Servers product."

But it still comes down to being a hosting company, not unlike GoDaddy. Mosso was white-label hosting. They bought Webmail.us (hosted email service); Slicehost (virtual servers or VPS); and Jungle Disk (online backup). This is the hosting business that they wrapped up with support. Today, they are struggling to pivot to a professional services organization with less reliance on their own computing infrastructure and more on supporting AWS and Azure customers. That would need to be done in private, not in the light of Wall Street, those unforgiving lords.

What is unfortunate for these companies is that an LBO means that there will be some cost cutting - and that means layoffs. Who are the first to go? Usually your better employees because they have a choice where to work. You lose your Linchpins. And we all know that Synergies is the marketing term for RIF (reduction in force), the coined term that is better than saying Layoffs. Marketing will make it all better.

More of this trend to continue as companies try to navigate the waters of our new economy, the short termed mentality on Wall Street and the business model of the cloud.



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