Rackspace continues buying spree to boost services

E-mail service Mailgun is Rackspace's seventh acquisition in five years, and third this year alone

Mergers and acquisitions are a steady source of churn in the technology industry and for cloud-service provider Rackspace, the company's M&A strategy has allowed it to expand into new areas of service, and beef up its existing offerings.

Rackspace has kept up a steady stream of M&A activity, including this week purchasing its seventh company in five years and its third this year alone. The latest addition is Mailgun, a transactional email service targeted at developers and Rackspace Senior Vice President of Corporate Development Pat Matthews says it will not be the last acquisition for the company.

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Compared to other tech companies, Rackspace has not been overly aggressive in M&A activity, says Pat Walravens, an analyst at financial advisory JMP Securities who tracks Rackspace. Google, for example is famous for gobbling up companies. Compared to other major cloud-computing companies though, Rackspace has been fairly active. Its biggest competitor, Amazon Web Services, for example, has not made any major acquisitions recently, he noted.

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Mailgun, Rackspace's latest buy, allows developers to install an e-mail notification service in their application that alerts users when a certain trigger happens. Think of it as your airline sending you an automatic reminder that your flight is coming up tomorrow. It's just the latest in a string of acquisitions the company has made not just this year, but over the past half-decade.

Perhaps the most significant purchase came in October 2008 when Rackspace purchased Slicehost, marking Rackspace's foray into the cloud computing area, branching out from its traditional managed services practice. Slicehost code was the basis for the company's original cloud technology, which it is now migrating away from in favor of running its system on OpenStack.

Other acquisitions have included:

• June, 2007: Webmail.us, an e-mail inbox service

• October 2008: JungleDisk, a data storage and backup service

• December 2010: Cloudkick, cloud monitoring technology

• February 2012: Anso Labs, creators of Nova, the OpenStack compute project for building private clouds

• February 2012: SharePoint911, Microsoft SharePoint Consultancy

• August 2012: Mailgun, e-mail notification service for developers

Matthews, the Rackspace development officer, says the company looks for three major things when deciding to purchase a company: solid technology, entrepreneurial or engineering talent, and new market opportunities or expanded services. And Rackspace is on the lookout for more companies to buy, he notes. Particular areas of interest for future acquisitions include database management, security and cloud storage, he says.

Lydia Leong, a Gartner cloud analyst says Rackspace's M&A moves come down to a simple strategy: Rackspace wants to beef up its offerings for customers in as many areas as possible. Its recent acquisitions - SharePoint and Mailgun - add services on top of its current offerings that appeal to the enterprise market, building up an "API ecosystem," she says to enhance its cloud offerings.

Matthews says in addition to M&A the company works hard to internally develop. For example, as a lead on the OpenStack project after co-founding it with NASA in 2010, Rackspace has been one of the major contributors of the code to the project and has basically been its biggest cheerleader in the market. The Anso Labos acquisition supported those efforts by bringing on OpenStack coder expertise to the company.

Not all acquisitions go smoothly though. Shortly after Rackspace launched its OpenStack powered clouds a crew of developers Rackspace acquired from Anso left the company to work for another OpenStack company, Nebula. Matthews says the reality of the high-tech space is that talent can be hard to keep. "Our goal is to keep entrepreneurs as long as we possibly can," he says, adding that's not always possible though.

Acquiring and keeping talented engineers is an issue Rackspace, which is based in San Antonio, Texas, has struggled with throughout the life of the company as it has increased its prominence in the cloud marketplace, Walravens says. The cloud industry is fast-changing and with other big-name players such as Google, Microsoft and Amazon all fighting for cloud engineers. Not being headquartered in Silicon Valley or Seattle could be making it harder for the company to acquire and keep talent, Walravens says. "M&A helps close that gap," he adds.

Overall though, Walravens says Rackspace has been a "home run" of a company and he sees plenty of upside as OpenStack continues to gain prominence as a market alternative to Amazon Web Services. The more companies coalesce around OpenStack, the more opportunity down the line Rackspace will have to provide support services around the project. Eventually, he says, Rackspace data centers could be an option for smaller companies within the OpenStack ecosystem to host their services from, creating an ongoing revenue stream for Rackspace. Meanwhile, as Rackspace has embraced OpenStack on its back end, Walravens says it has now increased its capacity to handle large-scale cloud computing projects that may have been typically only handled by Amazon Web Services. Bigger deals mean more revenue, and more opportunity to continue its M&A strategy.

But while M&A has been an important way of supplementing its internal development and service offerings, Rackspace does not appear to invest a significant portion of its annual revenues on M&A. The company does not disclose the cost of the acquisitions, but in its latest quarterly report to the U.S. Securities and Exchange Commission, the company notes that previous acquisitions have combined a one-time payment, plus ongoing payments. Rackspace expects to pay about $7.4 million on those ongoing expenses from its three acquisitions this year, but it does not disclose how much the initial payments were. That's out of the more than $1 billion in revenue the company recorded last fiscal year.

Network World staff writer Brandon Butler covers cloud computing and social collaboration. He can be reached at BButler@nww.com and found on Twitter at @BButlerNWW.

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