Private Equity Case Study: Rackspace Technology
Apollo helped Rackspace diversify its cloud service offerings amid growing competition from Amazon, Google, and Microsoft.
Between 2016 and 2020, Rackspace Technology, a major player in the cloud services industry, transformed its business to increase earnings under the guidance of private equity sponsor, Apollo Global Management. When Apollo acquired Rackspace in a $4.3 billion take-private deal in 2016, the company reported $2 billion in revenue and $684 million in EBITDA. By 2020, Rackspace’s revenue had grown 35% to $2.7 billion and EBITDA increased by 11% to $762 million.
Apollo’s situational analysis of Rackspace at the time revealed that the 18 year-old company had reached a mature stage in its growth cycle, marked by slowing growth and increasing competition from new market entrants, such as Amazon Web Services, Google Cloud, and Microsoft Azure. Apollo’s transformation strategy was to increase Rackspace’s earnings through expanded service offerings, M&A, and rebranding.
Transformation Strategy
The first of the three major transformation initiatives that helped Rackspace generate greater earnings was diversifying its service offerings. Competitors were taking share from Rackspace’s cloud hosting solutions in the mid-2010s, so the company launched a suite of services around cloud services which Rackspace called “multicloud services.” For example, Rackspace began offering a managed service to help businesses manage cloud services offered by other companies, such as Amazon, Google, and Microsoft. Rackspace used its managed service offering as a customer acquisition tool and then tack-on value-added services such as database management, security services, application management, and data analytics services. This strategy helped Rackspace grow revenue at a CAGR of 7% in the two years following Apollo’s buyout, compared to 4% growth in the years prior, even in the face of declining market share in the cloud services segment.
