UPDATED 06:50 EDT / SEPTEMBER 08 2014

CenturyLink targets Rackspace in rumored acquisition bid

small__4028939570Web hosting provider Rackspace Hosting Inc. is reported to be the subject of a takeover bid by the telecommunications firm CenturyLink Inc.

The eyebrow-raising news was reported by Bloomberg over the weekend, which said the two firms had “discussed the idea” sometime last month. As always, Bloomberg relied on quotes by people “familiar with the matter” and claimed a “less than 50 percent chance” of the deal going through. Nevertheless, there are a few compelling reasons why an acquisition could make sense.

Though it would never admit it, Rackspace is in a bit of a pickle. It’s struggling to get any more of a foothold in an increasingly competitive cloud infrastructure marketplace. There are numerous OpenStack-based clouds to compete with Rackspace’s offering, and as larger vendors like Google Inc., Microsoft Corp., and IBM slowly but surely fashion  compelling alternatives to rival Amazon Web Services, little ol’ Rackspace is in danger of being frozen out.

Rackspace has attempted to differentiate itself with “fanatical support”, providing the kind of handholding that its larger competitors are unable to offer. That model might appeal to some companies but the support itself is very expensive to provide. Add to the fact its competitors are outspending it by billions, and it’s clear that Rackspace has a problem.

Rackspace knows this, and even though it maintains it’s still able to go it alone, it was widely reported to have hired the services of Morgan Stanley to explore options to save itself, including an acquisition or merger.

The question is, why would CenturyLink – the third largest telecommunications firm in the US – be interested in Rackspace? The answer is that it could be trying to reinvent itself as a cloud player.

CenturyLink has already made a few acquisitions in this field, most notably paying $2.3 billion to buy data center and hosting company Savvis Inc. back in 2011. Since then it’s snapped up AppFog, a Portland-based Platform as a Service, and Tier 3, a Seattle-based infrastructure as a service (IaaS), platform and advanced cloud management company based on Cloud Foundry.

Numbers-wise the deal looks to be plausible, though it would certainly be expensive. Bloomberg says that CenturyLink is valued at around $23.6 billion, while Rackspace is worth just over $5 billion.

A Rackspace spokesman said the company does not comment on speculation; CenturyLink also refused to comment.

photo credit: miuenski via photopin cc

A message from John Furrier, co-founder of SiliconANGLE:

Your vote of support is important to us and it helps us keep the content FREE.

One click below supports our mission to provide free, deep, and relevant content.  

Join our community on YouTube

Join the community that includes more than 15,000 #CubeAlumni experts, including Amazon.com CEO Andy Jassy, Dell Technologies founder and CEO Michael Dell, Intel CEO Pat Gelsinger, and many more luminaries and experts.

“TheCUBE is an important partner to the industry. You guys really are a part of our events and we really appreciate you coming and I know people appreciate the content you create as well” – Andy Jassy

THANK YOU