Rackspace Partners Upbeat After Company Squashes Takeover Rumors

Channel partners appeared to have a more positive outlook Wednesday on Rackspace than Wall Street when it came to the cloud service provider's decision to remain an independent company and appoint a new CEO.

The San Antonio-based hosting giant said Tuesday it had rejected all offers for an acquisition. President Taylor Rhodes, who was concurrently named Rackspace CEO, said in a conference call that the decision was motivated by strong revenue results over the last two fiscal quarters and confidence in its core strategy. Rackspace also said that, for the time being, it would not pursue a buyback program.

Investors reacted by sending the company's stock down more than 16 percent in extended trading Tuesday and shares continued their tumble Wednesday, closing down about 18 percent at $32.39 for a market capitalization of $5.63 billion.

[Related: Rackspace To Remain Independent, Names CEO]

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The news put to rest M&A rumors that had been swirling since Rackspace disclosed in a May filing with the Securities and Exchange Commission that it hired Morgan Stanley to look into possible strategic partnerships. It also assuaged some partner and customer uncertainty fomented by the rumors, with some partners telling CRN they have faith in Rackspace as an independent organization and believe it is charting a positive approach to how it deals with the channel.

"We believe they're financially stable [and] they have a solid portfolio of offerings," John Flores, vice president of marketing and business development at San Antonio-based system integrator Sigma Solutions, told CRN. "Rackspace's model, which is an evolving channel strategy, has really been a good fit for Sigma because it plays in the enterprise segment of the market."

The uncertainty about Rackspace's future had been on the minds of many of the company's partners, Will Knight, vice president of channel sales at Rackspace, told CRN.

"Customers and partners were asking us about the status ever since May," Knight said, adding that legal limitations of the evaluation process barred the company from keeping them informed of developments.

"For any partners or customers who were concerned, or had worried about [a decline in support or changes to the channel program], that's completely lifted, which is fantastic. Now we can confidently say fanatical support certainly is here to stay going forward. And the partner programs are here to stay going forward," Knight told CRN.

Not only was the third fiscal quarter one that saw accelerated year-over-year revenue, but partners accounted for a larger percentage of new revenue growth. That indicates that the "partner program is healthy and growing and on the right trajectory," Knight said.

NEXT: Going Forward With The Channel

Flores said the decision to remain independent will change little for his company's Rackspace practice, mainly because Sigma wasn't paying too much mind to the rumors and speculation before Tuesday's announcement.

"You can't run your business based on speculation," Flores said.

Sigma's customers were confident in hosting their applications with Rackspace during the period the company was evaluating potential offers because they trusted the system integrator and the vendor relationships it introduced to them.

"We felt as confident in Rackspace prior to yesterday's announcement as we do today," Flores told CRN.

Lane Campbell, CEO of Chicago-area solution provider Syntress SCDT, has been openly critical of Rackspace's approach to dealing with its partner community.

But Campbell said the company may be on the right track to assuaging his concerns, which include poor margins and competition between the vendor and its channel.

The hiring of Knight, who came from Microsoft earlier this year to lead Rackspace's channel programs, is evidence the company "gets that the path to growth is through strong partnerships," Campbell told CRN.
Campbell said he has "high hopes" that if Rhodes, as the new CEO, entrusts Knight to execute his channel vision, "they will correct their course and embrace partnerships in 2015."

Knight told CRN the new CEO will be a boon to the company’s channel.

’He's a big believer in the channel and he understands the value that partners bring to us through their local knowledge of customers and expertise in doing migrations. Taylor clearly recognizes that.’

Knight said when he was interviewing for the position he asked Rhodes for his view of the company’s partners, and the answer played a big part in his decision to join Rackspace.

’He said partners are critical to our success and we need them to accelerate business, both theirs and ours," he said.

Competition has intensified in recent years, and many new entrants to the market are at work building cloud servers and offering hosting services, Campbell said.

"That's where I think a vibrant partner community can help Rackspace. Unlike previous years where they had a very go-it-alone attitude and grew, the coming next few years are going to require they work with as many partners as possible or their market share will erode," Campbell told CRN.