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Should IBM Or Hewlett-Packard Acquire Rackspace?

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Rackspace (NYSE: RAX) became an intriguing tech stock after the company announced that it had hired Morgan Stanley to evaluate its strategic alternatives.

No one knows if a merger will actually occur. And if it does, the buyer is still a question mark, as there are many possible suitors.

Ivan Feinseth, the Chief Investment Officer of Tigress Financial Partners, thinks that IBM (NYSE: IBM) or Hewlett-Packard (NYSE: HPQ) could benefit greatly from doing the deal.

"The benefit of a hardware manufacturer buying them is that they have an additional hardware customer and it gives the hardware maker a cloud platform," Feinseth, who has a Strong Buy on Rackspace, explained. "So that's why I say it's either HP or IBM."

AT&T was initially on his list as well, but that changed after the company announced its merger with DirecTV.

Related: AT&T And DirecTV Merger Is 'Bad For All Consumers'

"It looks like they're going in a different direction," Feinseth said of AT&T's prospects.

In addition to Hewlett-Packard and IBM, Feinseth believes that Google, Verizon and Citrix may also explore the value of Rackspace.

"It makes sense for Verizon," he said. "It makes sense for Citrix. It could make sense for Google."

Rackspace has a market cap of roughly $5 billion. Feinseth isn't sure which of his predicted buyers might pay the most, but he joked that Hewlett-Packard would be the highest bidder if Mark Hurd was still the CEO. The company is much less likely to pay the most under Meg Whitman's leadership.

If Rackspace can't find a buyer or simply decides not to sell, Feinseth said that the company still has "huge growth potential" in its OpenStack platform.

"Their growth engine is really the OpenStack hybrid cloud," said Feinseth. "[It] is their big thing."

Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.

Latest Ratings for RAX

DateFirmActionFromTo
Sep 2014CLSADowngradesUnderperformSell
Sep 2014JP MorganDowngradesOverweightNeutral
Jul 2014DA DavidsonUpgradesUnderperformNeutral

View More Analyst Ratings for RAX
View the Latest Analyst Ratings

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