[EN] Rackspace founder says company won’t be private for long
October 10, 2016
Apollo Global Management bought Rackspace Hosting Inc. knowing it was different from its past ventures into publishing companies, Vegas casinos, or even the maker of Ding Dongs and Twinkies, Rackspace co-founder and Chairman Graham Weston told the San Antonio Express-News.
The $4.3 billion transaction, set to close this year, will take the publicly traded company private again. But Weston is confident the San Antonio company’s withdrawal from the glare of Wall Street is temporary.
“I think it’s likely that Rackspace will go public again in the next five to seven years,” he said in an interview Friday at Texas A&M University — where he graduated 30 years ago with a degree in agricultural economics.
Apollo, known for successful takeovers of iconic brands such as snack baker Hostess and educational publisher McGraw-Hill Education Inc., on Aug. 26 announced it had finalized a deal valued at $4.3 billion for the city’s largest publicly traded technology company.
The agreement, the best of three leading offers, cashes shareholders out at $32 a share, a 38 percent premium to Rackspace’s closing price when news of an imminent deal leaked to the media. Shareholders are set to vote on the transaction Nov. 2.
“I think they were the high bidder for a reason,” Weston said. “They spent a substantial amount studying Rackspace and the opportunity of Rackspace’s future.”
While news of the sale came within days of news another local Fortune 400’s acquisition — Corner Store owner CST Brands Inc. on Aug. 22 said it was being bought for $4.4 billion by Circle K owner Alimentation Couche-Tard Inc. — Weston said the scenarios were very different.
“CST was bought by another convenience store chain,” he said. “I think Apollo has no other business in this industry.
“It’s not a Twinkie,” he said, referencing Apollo’s ability to return the all-but dead Hostess Brands and its cream-filled sponge cakes to grocers’ shelves.
A favorite story in San Antonio is how Rackspace was founded when three college students met with Weston and business partner Morris Miller at the Chester’s Hamburgers on Loop 410 and pitched the idea of renting data storage space. While Rackspace started out in 1998 as a sort of real estate firm for server space and went on to become one of the early pioneers in cloud computing, it was by 2015 being elbowed out by Silicon Valley.
The big players had jumped into the cloud game by then, and Rackspace found it couldn’t compete price-wise with the likes of Amazon, Microsoft and Google.
Investors realized it, too. The crisis was reflected in Rackspace’s sliding stock price.
The decision was made to focus on Rackspace’s trademarked “fanatical support.” The company went from competing with Amazon.com Inc. and Microsoft to offering them complimentary services like support and cloud management
But Rackspace’s deep pool of sales executives, Weston said, is no small part of the package Apollo is buying — nor is having a San Antonio-Austin hub and Rackspace’s current leadership team at the helm.
“We have a very strong professional sales team that is among the best in the industry, and I think they can add additional services to the same sales force,” he said. “They see Rackspace as a platform that they can build other services on top of.”
That sales focus ended up being Weston’s most formative takeaways from his days as a student at A&M — even if it was almost by happenstance.
Weston’s parents were British, and he remembers growing up in a small country school in Marion as “the kid with the foreign parents.”
He enrolled in A&M, fully intending to help work his family’s ranch in Guadalupe County. Real estate called him instead, whether with data storage or his ventures as a co-founder of local developer Weston Urban. The company plans to break ground in December on San Antonio’s first new downtown office tower in more than 25 years.
The sale has made Weston rich, but not as wealthy as he once was. Weston was worth more than $1.5 billion at Rackspace’s peak price — at least on paper. He’s walking away with approximately $606 million in cash on the Apollo sale.
Despite his fortunes, he still thinks his father — now 93 — is disappointed he didn’t get into raising cattle.
Weston said his move toward a “more informal supporter” of Rackspace will allow him to focus on reinvigorating San Antonio’s urban center.
“I’m focused on how do we make San Antonio a place my — our — children want to move home to,” he said.
In 2015 he donated an undisclosed amount to fund the Weston Sales EQ Program, which will offer a minor degree in sales to A&M’s Department of Agricultural Economics. The program will be managed by Kerry Litzenberg, whom Weston remembers as his favorite professor at A&M.
“He made a huge impression on me,” Weston said of Litzenberg. “One, he was my first computer class. And secondly, he taught us about professional sales.”
On Friday, Weston was on hand to cut the ribbon for the first classroom dedicated to coursework in the minor.
“Sales as a profession has had a bad brand,” Weston said. “And yet as we look at many organizations, many businesses, often the highest paid people in the organization are in sales. And I think that this is not known.”
While he said there would inevitably be changes at Rackspace, he said its sales acumen was something that he imagined Apollo would strive to retain.
“I think so many of our competitors didn’t believe in having live people to help customers make decisions and decide what to buy,” he said. “These systems are new, they’re still evolving. Amazon last year launched 750 different features. How do customers find their way through that number of features to figure out what to do?”
How Apollo proposes to cut Rackspace's operating costs by $100M
Rackspace has roughly 6,100 employees.
Oct 14, 2016
The private equity company that plans to acquire San Antonio-based Rackspace Hosting Inc. — thereby removing it from the ranks of publicly traded companies — in the coming months may trim $100 million from the local company's cloud business expenses, documents filed with the U.S. Securities and Exchange Commission indicate.
There are four key areas that New York-based Apollo Global Management LLC may target within the managed cloud provider, according to an investment thesis written by Aaron Sobel, a principal at Apollo.
The biggest opportunity to cut costs would be to reduce outsourced services and contracts, particularly the "rationalization of maintenance contracts on nonstandard hardware."
The second opportunity for Rackspace to save money would be to consolidate its information technology infrastructure, facilities and other expenses — or "de-prioritization of low-priority software and internal IT projects."
Beyond that, Apollo's Sobel identified minor gains that could be achieved by reducing fees or equity and legal counsel for the board of directors and other compliance-related costs.
Another cost-saving tactic could be for Apollo to negotiate lower health care-related costs with insurance companies by grouping employees from multiple portfolio companies. Rackspace has roughly 6,100 employees, so that could take a bite out of expenses.
The moves would fall in line with Rackspace's previous efforts to to reduce expenses and eliminate product lines until the managed cloud hosting model remains.
Rackspace, which spent $466 million on capital expenditures during second quarter 2015, reduced that amount to $385 million one year later.
Employee wages, data center costs, customer licenses and third-party infrastructure expenses equal roughly half of Rackspace's expenses stemming from cost of revenue. Of that, 37 percent of costs are for employees, referred to internally as Rackers.
General and administrative expenses total about 25 percent — about 17 percent on sales and marketing and 8 percent on research and development.
Rackspace stockholders are expected to vote on the $4.3 billion deal, which would take the company private, in November.