Rackspace To Remain Independent, Names CEO

Rackspace said Tuesday it will remain an independent company, having rejected all offers on an acquisition, and concurrently named President Taylor Rhodes the company's new CEO. The change is effective immediately.

After months of heated M&A rumors and wild speculation, the San Antonio-based cloud and server hosting company said it formally concluded the process of evaluating potential mergers and acquisitions, and for the time being has also decided not to pursue a stock buyback program.

Outgoing CEO Graham Weston will remain Chairman of Rackspace's board of directors, told investors the decision to remain independent stemmed from the company's recent revenue growth, and its confidence in the Managed Cloud strategy it began promoting earlier this year.

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The decision "confirmed our commitment to and belief in the inherent value of our business and our strategy to capitalize on the growing market opportunity for managed cloud services," Weston told investors in a conference call Tuesday afternoon.

Rhodes said the company's increasing share in the growing managed cloud market will continue to differentiate Rackspace. The new CEO promised investors that the company will soon show growth in its margins.

"We will show margin improvement in the very near-term future," Rhodes said.

Rhodes, who has been with Rackspace since 2007, was also given a seat on the board in addition to the promotion.

He told investors Rackspace is hard at work executing its plan to claim more share of the managed cloud market, which it sees as being distinct from the commodity IaaS market being fought over by competitors.

The company saw accelerated revenue growth in the second quarter, and demand remained strong in the third quarter, testaments to the underlying strength of the business, Rhodes said. He added there will be "plenty of opportunities to drive both revenue growth and margin improvement."

The decision to not repurchase stock is based on the company's desire to remain flexible in pursuing its own acquisitions and to avoid incurring debt. But the prospect of a buyback, while not being executed, remains on the table, Rhodes said.

Rackspace has been the subject of acquisition speculation since it disclosed in a May 15 filing with the SEC that it hired Morgan Stanley to evaluate potential strategic partnerships.

Rhodes said the process would have ended sooner "if we thought we didn't have good prospects."

The execs could not discuss premium offers they received during the evaluation period.

Weston, a Rackspace cofounder, said in a prepared statement, that the company thoroughly considered all options.

"In this process we talked to a diverse group of interested parties and entertained different proposals. None of these proposals were deemed to have as much value as the expected value of our standalone plan.

"We concluded that the company is best positioned to drive value for shareholders, customers and Rackers through the continued execution of its strategic plan to capitalize on the growing market opportunity for managed cloud services," Weston said.

Rhodes said on the call with investors, "Our goal throughout the whole evaluation was maximizing shareholder value."

Rhodes, a one-time officer in the U.S. Marine Corps, will continue to serve as the company's president in addition to his new role. He came to Rackspace in 2007 to lead the unit responsible for the company's Fanatic Support, and since then has held several senior leadership roles with the company.

The process of evaluating partnerships, and the uncertainty it has caused among investors, customers and staff, has been a great distraction, Rhodes said.

"It's full steam ahead now that this distraction has been lifted from us," he said.