Rackspace Hosting, Inc. (RAX) Decides to Stay Independent, Shares Plummet 17%

Rackspace Hosting, Inc. (RAX)

It was the worst surprise that Taylor Rhodes, new CEO of Rackspace Hosting, Inc. (NYSE:RAX), could have expected from the investors. Shares of Rackspace fell nearly 17% after the announcement that the company would stay independent and called off selling efforts.

Rackspace Hosting, Inc. (NYSE:RAX) mentioned in its May SEC filing that the company is involved in a strategic review process and the filing read,

“No decision has been made, and there can be no assurance that the board’s review process will result in any partnership or transaction being entered into or consummated.”

The shares of Rackspace Hosting, Inc. (NYSE:RAX) rose nearly 28% post this filing.

However, Rackspace announced on Tuesday that the company was calling off sale efforts and would stay independent for the upcoming years. Rhodes, previous Rackspace president, took the CEO cap from the co-founder Graham Weston. In addition to calling off the sale efforts, the hosting provider announced that the company would not engage in any share repurchase activities in the near future triggering investors’ rage. This announcement further raised questions in the mind of analysts and financial experts.

Rackspace Hosting, Inc. (RAX)

 

Andrew Nowinski, Piper Jaffray, said,

“Management stated they want to preserve their balance flexibility to use for acquisition purposes.” He further added, “Rackspace is not a technology company. They do not make products. They are just a services company, so [I’m] not sure what they could acquire that would benefit shareholders and accelerate their revenue growth.”

The shares of Rackspace Hosting, Inc. (NYSE:RAX) are trading at nearly 40% lower than 52-week high and an acquisition would have been the only way investors could have gained something from the company. The hosting provider has reported lower earnings per share over the past years and it has reported lower cash flow for the last few quarters.

This article has been written by Prakash Pandey.

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