Cloud Service Provider Rackspace on Buying Spree to Boost Services

Rackspace has kept up a steady stream of M&A activity, including this week purchasing its seventh company in five years and its third this year alone. The latest addition is Mailgun, a transactional email service targeted at developers and Rackspace Senior Vice President of Corporate Development Pat Matthews says it will not be the last acquisition for the company.

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Compared to other tech companies, Rackspace has not been overly aggressive in M&A activity, says Pat Walravens, an analyst at financial advisory JMP Securities who tracks Rackspace. Google, for example is famous for gobbling up companies. Compared to other major cloud-computing companies though, Rackspace has been fairly active. Its biggest competitor, Amazon Web Services, for example, has not made any major acquisitions recently, he noted.

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Perhaps the most significant purchase came in October 2008 when Rackspace purchased Slicehost, marking Rackspace's foray into the cloud computing area, branching out from its traditional managed services practice. Slicehost code was the basis for the company's original cloud technology, which it is now migrating away from in favor of running its system on OpenStack.

Other acquisitions have included:

" June, 2007: Webmail.us, an e-mail inbox service

" October 2008: JungleDisk, a data storage and backup service

" December 2010: Cloudkick, cloud monitoring technology

" February 2012: Anso Labs, creators of Nova, the OpenStack compute project for building private clouds

" February 2012: SharePoint911, Microsoft SharePoint Consultancy

" August 2012: Mailgun, e-mail notification service for developers

Lydia Leong, a Gartner cloud analyst says Rackspace's M&A moves come down to a simple strategy: Rackspace wants to beef up its offerings for customers in as many areas as possible. Its recent acquisitions - SharePoint and Mailgun - add services on top of its current offerings that appeal to the enterprise market, building up an "API ecosystem," she says to enhance its cloud offerings.

Matthews says in addition to M&A the company works hard to internally develop. For example, as a lead on the OpenStack project after co-founding it with NASA in 2010, Rackspace has been one of the major contributors of the code to the project and has basically been its biggest cheerleader in the market. The Anso Labos acquisition supported those efforts by bringing on OpenStack coder expertise to the company.

Not all acquisitions go smoothly though. Shortly after Rackspace launched its OpenStack powered clouds a crew of developers Rackspace acquired from Anso left the company to work for another OpenStack company, Nebula. Matthews says the reality of the high-tech space is that talent can be hard to keep. "Our goal is to keep entrepreneurs as long as we possibly can," he says, adding that's not always possible though.

Acquiring and keeping talented engineers is an issue Rackspace, which is based in San Antonio, Texas, has struggled with throughout the life of the company as it has increased its prominence in the cloud marketplace, Walravens says. The cloud industry is fast-changing and with other big-name players such as Google, Microsoft and Amazon all fighting for cloud engineers. Not being headquartered in Silicon Valley or Seattle could be making it harder for the company to acquire and keep talent, Walravens says. "M&A helps close that gap," he adds.

But while M&A has been an important way of supplementing its internal development and service offerings, Rackspace does not appear to invest a significant portion of its annual revenues on M&A. The company does not disclose the cost of the acquisitions, but in its latest quarterly report to the U.S. Securities and Exchange Commission, the company notes that previous acquisitions have combined a one-time payment, plus ongoing payments. Rackspace expects to pay about $7.4 million on those ongoing expenses from its three acquisitions this year, but it does not disclose how much the initial payments were. That's out of the more than $1 billion in revenue the company recorded last fiscal year.

Network World staff writer Brandon Butler covers cloud computing and social collaboration. He can be reached at BButler@nww.com and found on Twitter at @BButlerNWW.