Credit Suisse Thinks An Acquisition is More Likely For Rackspace Than LBO, Names Potential Buyers

Rackspace (NASDAQ: RAX) has been one of the hottest stocks on Wall Street since the company announced it would hire an investment bank to help consider strategic proposals. Namely, investors have been wondering if a strategic acquisition or LBO are more likely.

Credit Suisse analyst Sitikantha Panigrahi weighs in on why a strategic acquisition is more likely than an LBO. This bodes well for Rackspace shareholders as strategic acquisitions typically fetch a higher price because cost saving synergies can act as a discount to the takeover price.

Regarding a strategic acquisition and potential acquirers, Panigrahi writes, “we continue to believe that Rackspace's hybrid cloud offerings would be attractive to strategic acquirers, who could benefit by cross-selling managed cloud services to their installed bases. Specifically, hardware companies (e.g., Cisco, HP, and Dell) as well as Google and Pivotal (the EMC/VMware joint venture) could expand into the enterprise-focused cloud market by acquiring Rackspace.”

The research note also explains why an LBO is unlikely. Assuming a $45 takeover price and 50 percent of the transaction financed with debt, the PE fund would have to raise five times EBITDA. Credit Suisse says this, “would be challenging, given the capital-intensive nature of Rackspace’s business.”

Credit Suisse currently has an outperform rating and $40 price target (13.7 percent upside) on Rackspace.

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