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Apollo Global is buying Rackspace for $4.3B

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Re: Apollo Global is buying Rackspace for $4.3B

#121

Post by r00fus »

narrator wrote: post #100
dave_sullivan wrote: post #50

Earlier quoted context omitted.

Besides cost cutting via layoffs being a favored (although by no means the only) strategy for PE firms, there's also debt servicing. Typically, PE companies buy the company while only putting down a small portion of the purchasing price. They finance the rest through banks. The whole concept is pretty similar to buying a house with a mortgage, except you're buying a company. The debt payments are then a tax write-off…

It also depends on the kind of PE firm. The vulture firms will buy a stable firm and load it up with debt doing stock buybacks and then cash out and let the company crater. Other firms, like Texas Pacific Group, are turn around specialists that take struggling firms and fix their business processes to make them run better and raise the stock price by actually building a better company. There are a lot more of the for…

So where does Apollo Global sit on this spectrum of PE vulture turnaround ?

Re: Apollo Global is buying Rackspace for $4.3B

#122

Post by forgetsusername »

ryanSrich wrote: post #72
ghshephard wrote: post #8

Earlier quoted context omitted.

Re: "Business not in terribly good shape" - there are 4.3 Billion reasons to suggest otherwise. This isn't the type of business that gets purchased without a lot of due diligence, and, we're not really in much of a tech bubble right now - so I thinks it's reasonable to asses that the underlying revenue/profit of Rackspace was sufficient to justify the (impressive) valuation.

The assumption on Hacker News is that a buyout/acquisition === failing. This is sometimes true and sometimes not true.

>The assumption on Hacker News is that a buyout/acquisition === failing

Their market cap was over $10BB a few years ago, and they were purchased for less than half of that. Something went wrong; what do you suppose that was?

Re: Apollo Global is buying Rackspace for $4.3B

#125

Post by e15ctr0n »

dave_sullivan wrote: post #50
whateverdudes wrote: post #38

Earlier quoted context omitted.

Off topic, but can you tell me more about the issue with being taken over by a private equity firm? I work for a 10k employee company who will be taken off stock exchange and sold to a Chinese equity firm.

Besides cost cutting via layoffs being a favored (although by no means the only) strategy for PE firms, there's also debt servicing. Typically, PE companies buy the company while only putting down a small portion of the purchasing price. They finance the rest through banks. The whole concept is pretty similar to buying a house with a mortgage, except you're buying a company. The debt payments are then a tax write-off…

Buying a company with borrowed funds and using the company's cash flows or assets to repay the loan is known as a Leveraged Buy Out (LBO) [0]. It was very trendy in the 1980s but has recently made a comeback.

A good book to read on one of the most notorious examples of an LBO is Barbarians at the Gate [1][2] which dealt with the takeover of RJR Nabisco, a large American food and tobacco company.

For lighter fare, re-watch the 1990 movie Pretty Woman [3][4] but this time ignore the fluffy romance and focus on Richard Gere's character, Edward Lewis, as he goes about negotiating the LBO of a shipbuilding company. Edward Lewis was modeled on a real-life LBO guy, Reginald Lewis, who bought Beatrice International Foods from Beatrice Companies in 1987 in an LBO worth $985 million [5].

[0] https://en.wikipedia.org/wiki/Leveraged_buy_out

[1] https://en.wikipedia.org/wiki/Barbarians_at_the_Gate:_The_Fa...

[2] http://amzn.com/0061655554

[3] https://en.wikipedia.org/wiki/Pretty_Woman

[4] http://www.imdb.com/title/tt0100405/

[5] https://en.wikipedia.org/wiki/Reginald_Lewis

Re: Apollo Global is buying Rackspace for $4.3B

#126

Post by wslh »

rkrzr wrote: post #5

Rackspace has been looking for a buyer for a while. I suspect that their business is not in terribly good shape. They even started consulting on AWS deployments a while back: "Need some help moving your servers over to AWS? We're here to help!"

If we quickly compare Rackspace [1] against Amazon (as a whole) we can find Rackspace margins are bigger except on "Return on average equity".

[1] https://www.google.com/finance?q=NYSE%3ARAX

[2] https://www.google.com/finance?q=NASDAQ%3AAMZN

Re: Apollo Global is buying Rackspace for $4.3B

#127

Post by Cymen »

whateverdudes wrote: post #38
chollida1 wrote: post #9

I guess it was only a matter of time before they got bought out. It's tough to compete against one of Google, Amazon or Microsoft, competing against all 3 at the same time in an area that all three consider to be core to their future must just be cut throat! It's never great for a companies employee's to be taken over by a private equity firm, if you actually find someone whose had a good experience then please let m…

Off topic, but can you tell me more about the issue with being taken over by a private equity firm? I work for a 10k employee company who will be taken off stock exchange and sold to a Chinese equity firm.

I worked for an ISP (Berbee or BINC) that was merged with CDW. It was exactly as outlined above -- the private equity company had a big stake in both and merged them together for a later IPO.

In my experience, it was painful because a small highly technical organization was smashed onto a huge sales-centric company. The cultures were not the same at all. It wasn't horrible and I wasn't there long enough to benefit from anything (the Berbee founder gave some ownership to people who had been there longer -- my stay was brief during and after college so it was fine by me). But the resulting company wasn't as interesting to work at and today many of the people I knew who worked there moved on to other competitors in the local market. Nothing wrong with change but it was an awesome company before the merger.

So you might expect in the future to be merged with a company that looks good on paper but is painful in practice. But of course from the PE viewpoint, the point is to make money so as long as that happens, it's a win. It's just their interests are probably not aligned with yours.

Re: Apollo Global is buying Rackspace for $4.3B

#128

Post by gaius »

dave_sullivan wrote: post #50
whateverdudes wrote: post #38

Earlier quoted context omitted.

Off topic, but can you tell me more about the issue with being taken over by a private equity firm? I work for a 10k employee company who will be taken off stock exchange and sold to a Chinese equity firm.

Besides cost cutting via layoffs being a favored (although by no means the only) strategy for PE firms, there's also debt servicing. Typically, PE companies buy the company while only putting down a small portion of the purchasing price. They finance the rest through banks. The whole concept is pretty similar to buying a house with a mortgage, except you're buying a company. The debt payments are then a tax write-off…

Typically, borrow the money to buy the company, then transfer the debt onto that company's own balance sheet, meaning they have taken control of a company effectively for $0.

Then the asset stripping begins.

Re: Apollo Global is buying Rackspace for $4.3B

#129

Post by funkyy »

aianus wrote: post #79
crucialfelix wrote: post #62

Earlier quoted context omitted.

I've gotten the same recommendation from them. I complained because they pulled the network connection on the drive connected to the database and completely torched the drive. They were like: well maybe you should consider running multiple database machines with replication so you can survive the next time we screw things up.

This is true for all VPS hosting. They're cheap because they're commodity hardware that sometimes fails.

Full VPS backup should be standard feature of all premium providers...

Re: Apollo Global is buying Rackspace for $4.3B

#130

Post by ottodidakt »

dave_sullivan wrote: post #50
whateverdudes wrote: post #38

Earlier quoted context omitted.

Off topic, but can you tell me more about the issue with being taken over by a private equity firm? I work for a 10k employee company who will be taken off stock exchange and sold to a Chinese equity firm.

Besides cost cutting via layoffs being a favored (although by no means the only) strategy for PE firms, there's also debt servicing. Typically, PE companies buy the company while only putting down a small portion of the purchasing price. They finance the rest through banks. The whole concept is pretty similar to buying a house with a mortgage, except you're buying a company. The debt payments are then a tax write-off…

I hear that this financing model allows the PE firm to limit downside (to what they put down) while allowing for unlimited upside (since the equity is theirs). What's in it for the banks that finance most of it? Just the interest on unsecured loans? Aren't these interest rates typically worse than those on retail (house, credit-card, education) loans?
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