Like Microsoft, Rackspace Pops on Addition by Subtraction

Jacob Harper  |

Sometimes the problems with a tech company have nothing to do with the tech at all, but with the people in trying to sell it. Addition by subtraction certainly can work wonders for a tech company’s stock in this exact manner. For real-life examples, take a gander at what happened to the share price of Microsoft (MSFT) following the mere announcement that CEO/resident punching bag Steve Ballmer was exiting his post. Before a successor was even named, the mere idea that the albatross around its neck was off sent shares of the blue-chip up 8 percent in a single session.

It’s not just moribund tech behemoths that can win by losing a key player. On May 16 shares of cloud computing company Rackspace Hosting (RAX) shot up on the news that they were open to selling out. There’s no buyer yet, mind you, but the mere fact that they are turning over the keys to a more experienced company – any more experienced company – got investors cheering.

It makes little sense that Rackspace should have shed half its value in the last nine months, but that’s exactly what’s happened. The company is in the red-hot cloud computing biz, and, while they don’t have the firepower of a big player like Amazon (AMZN) , it still doesn’t explain why they have consistently been unable to realize high profits.

This is why the very fact they are selling out sent shares soaring. Analysts think the company is wildly undervalued, at least under current management. With the right parent company, Rackspace’s value is estimated to be as much as twice what it was trading at prior to the announcement.

Concerning the identity of Rackspace’s white knight, the rumor mill is already swirling. It’s all supposition, to be sure, but some names being floated include IBM (IBM) , acquisition-crazy AT&T (T) , and Hewlett-Packard (HPQ) , all companies with deep pockets and a proven track record.

With Big Data and cloud computing potentially giving companies a major edge in predicting market trends, and Rackspace remaining the second largest cloud company behind Amazon, they are sure to attract suitors. And as far as investors are concerned, it’s already a done deal. It just depends on how much its new owner is willing to spend. If a bidding war commences, it could be a lofty payout for shareholders indeed.

Rackspace has retained Morgan Stanley (MS) to handle any acquisition. On news they were actively shopping themselves, shares of Rackspace climbed 17.73 percent to $36.12 a share. Analyst estimates for an eventual buyout price have reached as high as $52 a share.   

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
MS Morgan Stanley 41.88 0.63 1.53 9,579,411 Trade
HPQ HP Inc. 19.13 0.16 0.84 10,991,490 Trade
T AT&T Inc. 31.39 0.62 2.01 24,302,080 Trade
MSFT Microsoft Corporation 117.91 0.25 0.21 25,997,281 Trade
RAX Rackspace Hosting Inc n/a n/a n/a 0 Trade
ENCC Encompass Compliance Corp. 0.00 0.00 0.00 0
IBM International Business Machines Corporation 140.22 1.04 0.75 2,409,349 Trade
AMZN Amazon.com Inc. 1,783.76 9.50 0.54 4,854,978 Trade

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