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Rackspace Insists It Will Stay Independent Amid Takeover Talk

By Steven Russolillo Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Rackspace Hosting Inc. (RAX) Chief Executive Lanham Napier insists his company is focused on remaining a stand-alone player even as deal chatter within the data-storage sector intensifies. Rackspace, a data-center operator in the hosting and so-called cloud computing industry, has seen its share price soar 45% since January amid strong revenue growth and continued takeover speculation. The stock, which has nearly tripled in price from a year ago, hit a fresh all-time high Friday as Wall Street continues to bet Rackspace is an attractive candidate to be acquired. But Napier maintained he is focused on keeping Rackspace independent and will continue to explore partnerships and small acquisitions. "I think the merger-and-acquisition speculation is a massive distraction," Napier said in an interview with Dow Jones Newswires. "We love our business, and we are an organic-growth company. We're looking at start ups that share our values and believe in our mission of being a leader in service cloud computing." Rackspace, Dell Inc. (DELL) and Equinix Inc. (EQIX) said earlier this week that they have collaborated to develop an open-source cloud-computing platform--dubbed OpenStack--which is aimed to compete against Amazon Inc.'s (AMZN) Web Services. Rackspace late last year said it acquired Cloudkick, a web-application provider that helps to manage servers. Napier said these are examples of the strategic roadmap Rackspace wants to keep pursing in the future. The takeover chatter surrounding Rackspace, Savvis Inc. (SVVS) and other cloud-service providers follows Verizon Communications Inc.'s (VZ) recent announcement to acquire Terremark Worldwide Inc. (TMRK) in a $1.4 billion deal and Time Warner Cable Inc.'s (TWC) deal to take over NaviSite Inc. (NAVI) for about $230 million. Both deals earlier this year highlight the attractiveness of up-and-coming cloud-services providers to larger and more established companies. Businesses are showing a greater interest in cloud computing, which enables more cost-efficient access to computer servers and data storage over the Internet and internal networks. Data tracker In-Stat LLC has said U.S. spending on cloud computing and managed hosting should surpass $13 billion in 2014, up from less than $3 billion in 2010. "The cloud-computing category is white hot," Napier said. "And now you have tech incumbents with cash that are trying to buy their way in." Business spending is starting to pick up again coming out of the recession. Companies are slowly becoming more comfortable investing in technology now that sales and profits have not only stabilized but are expanding. "If I was to say a year ago I was cautiously optimistic about business spending, then this year in general I'd say the caution is down and the optimism is up," Napier said. "But do not infer things are ripping, and we're back off to the bucking-bronco days because we're not." Rackspace last month reported better-than-anticipated fourth-quarter revenue, due in large part to increased demand for its hosting services. For 2011, Rackspace said it expects revenue growth to exceed the 24% growth rate achieved last year. But analysts have questioned the capital-intensive nature of Rackspace's business model, especially because the company's capital-expenditure guidance will likely be higher than its revenue trajectory for 2011. "Our business will always be relatively capital intensive," he said, largely because the company regularly has to upgrade its infrastructure. "The magic is in the margin of service layer we add on top of that infrastructure. We're making investments to continue to make the business more capital efficient, but we have more work to do on it." Napier's insistence on keeping Rackspace independent contrasts with recent remarks from competitor Savvis CEO Jim Ousley. He has acknowledged that he has had more strategic discussions than usual with bankers and inquiring partners. But Napier said he remains focused on growing his company as a stand-alone player. "I absolutely have a fiduciary obligation, and I work for the stockholders," he said. "But we're trying to build something great, and greatness isn't achieved overnight. We're just getting going. When I think about the market opportunity to build the service leader in cloud computing, I think little old Rackspace will win that one." -By Steven Russolillo, Dow Jones Newswires; 212-416-2180; steven.russolillo@dowjones.com

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