UBS Outlines Potential Rackspace Acquisition

Shares of Rackspace RAX are up 36 percent in the past five trading sessions as the company reported strong first quarter earnings and Wall Street has been passing around rumors that the company may be acquired.

Shares shot higher last Thursday as the company disclosed in an 8-K that it had hired Morgan Stanley to help it explore the potential sale.

Steven Milunovich of UBS commented on the deal, “We think there is a limited set of acquirers, but combination makes sense for Rackspace given competitive challenges.”

Related: Rackspace Soars As Analysts respond To Company's Decision To Explore Strategic Relationships

The competition Milunovich refers to include companies with data hosting businesses such as Amazon, Google, Microsoft, IBM and Hewlett-Packard. These companies all have significantly more resources and a wider product offering than Rackspace, enabling faster development and cross selling.

Companies such as Dell and HP do not have the resources to buy Rackspace, which currently has a $5 billion market cap, according to the UBS note. Telecom companies are also unlikely to jump into the industry. The note goes on to say that Cisco, EMC and VMWare are all likely acquirers of the company.

Reasons to acquire Rackspace include: “(1) OpenStack expertise, (2) customer base, which is sticky in managed hosting, and (3) infrastructure, where Rackspace has spent over $1bn for 9 data centers on three continents with 106,000 servers.”

UBS currently has a Neutral rating on Rackspace with a $34 price target. Shares are trading at $35.76 in Monday afternoon's session.