Jul
10
2020
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Rackspace preps IPO after going private in 2016 for $4.3B

After going private in 2016 after accepting a $32 per share, or $4.3 billion, price from Apollo Global Management, Rackspace is looking once again to the public markets. First going public in 2008, Rackspace is taking second aim at a public offering around 12 years after its initial debut.

The company describes its business as a “multicloud technology services” vendor, helping its customers “design, build and operate” cloud environments. That Rackspace is highlighting a services focus is useful context to understand its financial profile, as we’ll see in a moment.

But first, some basics. The company’s S-1 filing denotes a $100 million placeholder figure for how much the company may raise in its public offering. That figure will change, but does tell us that firm is likely to target a share sale that will net it closer to $100 million than $500 million, another popular placeholder figure.

Rackspace will list on the Nasdaq with the ticker symbol “RXT.” Goldman, Citi, J.P. Morgan, RBC Capital Markets and other banks are helping underwrite its (second) debut.

Financial performance

Similar to other companies that went private, only later to debut once again as a public company, Rackspace has oceans of debt.

The company’s balance sheet reported cash and equivalents of $125.2 million as of March 31, 2020. On the other side of the ledger, Rackspace has debts of $3.99 billion, made up of a $2.82 billion term loan facility, and $1.12 billion in senior notes that cost the firm an 8.625% coupon, among other debts. The term loan costs a lower 4% rate, and stems from the initial transaction to take Rackspace private ($2 billion), and another $800 million that was later taken on “in connection with the Datapipe Acquisition.”

The senior notes, originally worth a total of $1,200 million or $1.20 billion, also came from the acquisition of the company during its 2016 transaction; private equity’s ability to buy companies with borrowed money, later taking them public again and using those proceeds to limit the resulting debt profile while maintaining financial control is lucrative, if a bit cheeky.

Rackspace intends to use IPO proceeds to lower its debt-load, including both its term loan and senior notes. Precisely how much Rackspace can put against its debts will depend on its IPO pricing.

Those debts take a company that is comfortably profitable on an operating basis and make it deeply unprofitable on a net basis. Observe:

Image Credits: SEC

Looking at the far-right column, we can see a company with material revenues, though slim gross margins for a putatively tech company. It generated $21.5 million in Q1 2020 operating profit from its $652.7 million in revenue from the quarter. However, interest expenses of $72 million in the quarter helped lead Rackspace to a deep $48.2 million net loss.

Not all is lost, however, as Rackspace does have positive operating cash flow in the same three-month period. Still, the company’s multi-billion-dollar debt load is still steep, and burdensome.

Returning to our discussion of Rackspace’s business, recall that it said that it sells “multicloud technology services,” which tells us that its gross margins will be service-focused, which is to say that they won’t be software-level. And they are not. In Q1 2020 Rackspace had gross margins of 38.2%, down from 41.3% in the year-ago Q1. That trend is worrisome.

The company’s growth profile is also slightly uneven. From 2017 to 2018, Rackspace saw its revenue expand from $2.14 billion to $2.45 billion, growth of 14.4%. The company shrank slightly in 2019, falling from $2.45 billion in revenue in 2018 to $2.44 billion the next year. Given the economy that year, and the importance of cloud in 2019, the results are a little surprising.

Rackspace did grow in Q1 2020, however. The firm’s $652.7 million in first-quarter top-line easily bested in its Q1 2019 result of $606.9 million. The company grew 7.6% in Q1 2020. That’s not much, especially during a period in which its gross margins eroded, but the return-to-growth is likely welcome all the same.

TechCrunch did not see Q2 2020 results in its S-1 today while reading the document, so we presume that the firm will re-file shortly to include more recent financial results; it would be hard for the company to debut at an attractive price in the COVID-19 era without sharing Q2 figures, we reckon.

How to value Rackspace is a puzzle. The company is tech-ish, which means it will find some interest. But its slow growth rate, heavy debts and lackluster margins make it hard to pin a fair multiple onto. More when we have it.

Jul
01
2020
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Unpacking how Dell’s debt load and VMware stake could come together

Last week, we discussed the possibility that Dell could be exploring a sale of VMware as a way to deal with its hefty debt load, a weight that continues to linger since its $67 billion acquisition of EMC in 2016. VMware was the most valuable asset in the EMC family of companies, and it remains central to Dell’s hybrid cloud strategy today.

As CNBC pointed out last week, VMware is a far more valuable company than Dell itself, with a market cap of almost $62 billion. Dell, on the other hand, has a market cap of around $39 billion.

How is Dell, which owns 81% of VMware, worth less than the company it controls? We believe it’s related to that debt, and if we’re right, Dell could unlock lots of its own value by reducing its indebtedness. In that light, the sale, partial or otherwise, of VMware starts to look like a no-brainer from a financial perspective.

At the end of its most recent quarter, Dell had $8.4 billion in short-term debt and long-term debts totaling $48.4 billion. That’s a lot, but Dell has the ability to pay down a significant portion of that by leveraging the value locked inside its stake in VMware.

Yes, but …

Nothing is ever as simple as it seems. As Holger Mueller from Constellation Research pointed out in our article last week, VMware is the one piece of the Dell family that is really continuing to innovate. Meanwhile, Dell and EMC are stuck in hardware hell at a time when companies are moving faster than ever expected to the cloud due to the pandemic.

Dell is essentially being handicapped by a core business that involves selling computers, storage and the like to in-house data centers. While it’s also looking to modernize that approach by trying to be the hybrid link between on-premise and the cloud, the economy is also working against it. The pandemic has made the difficult prospect of large enterprise selling even more challenging without large conferences, golf outings and business lunches to grease the skids of commerce.

Jun
24
2020
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Dell’s debt hangover from $67B EMC deal could put VMware stock in play

When Dell bought EMC in 2016 for $67 billion it was one of the biggest acquisitions in tech history, and it brought with it a boatload of debt. Since then Dell has been working on ways to mitigate that debt by selling off various pieces of the corporate empire and going public again, but one of its most valuable assets remains VMware, a company that came over as part of the huge EMC deal.

The Wall Street Journal reported yesterday that Dell is considering selling part of its stake in VMware. The news sent the stock of both companies soaring.

It’s important to understand that even though VMware is part of the Dell family, it runs as a separate company, with its own stock and operations, just as it did when it was part of EMC. Still, Dell owns 81% of that stock, so it could sell a substantial stake and still own a majority of the company, or it could sell it all, or incorporate into the Dell family, or of course it could do nothing at all.

Patrick Moorhead, founder and principal analyst at Moor Insights & Strategy, thinks this might just be about floating a trial balloon. “Companies do things like this all the time to gauge value, together and apart, and my hunch is this is one of those pieces of research,” Moorhead told TechCrunch.

But as Holger Mueller, an analyst with Constellation Research, points out, it’s an idea that could make sense. “It’s plausible. VMware is more valuable than Dell, and their innovation track record is better than Dell’s over the last few years,” he said.

Mueller added that Dell has been juggling its debts since the EMC acquisition, and it will struggle to innovate its way out of that situation. What’s more, Dell has to wait on any decision until September 2021 when it can move some or all of VMware tax-free, five years after the EMC acquisition closed.

“While Dell can juggle finances, it cannot master innovation. The company’s cloud strategy is only working on a shrinking market and that ain’t easy to execute and grow on. So yeah, next year makes sense after the five-year tax-free thing kicks in,” he said.

In between the spreadsheets

VMware is worth $63.9 billion today, while Dell is valued at a far more modest $38.9 billion, according to Yahoo Finance data. But beyond the fact that the companies’ market caps differ, they are also quite different in terms of their ability to generate profit.

Looking at their most recent quarters each ending May 1, 2020, Dell turned $21.9 billion in revenue into just $143 million in net income after all expenses were counted. In contrast, VMware generated just $2.73 billion in revenue, but managed to turn that top line into $386 million worth of net income.

So, VMware is far more profitable than Dell from a far smaller revenue base. Even more, VMware grew more last year (from $2.45 billion to $2.73 billion in revenue in its most recent quarter) than Dell, which shrank from $21.91 billion in Q1 F2020 revenue to $21.90 billion in its own most recent three-month period.

VMware also has growing subscription software (SaaS) revenues. Investors love that top line varietal in 2020, having pushed the valuation of SaaS companies to new heights. VMware grew its SaaS revenues from $411 million in the year-ago period to $572 million in its most recent quarter. That’s not rocketship growth mind you, but the business category was VMware’s fastest growing segment in percentage and gross dollar terms.

So VMware is worth more than Dell, and there are some understandable reasons for the situation. Why wouldn’t Dell sell some VMware to lower its debts if the market is willing to price the virtualization company so strongly? Heck, with less debt perhaps Dell’s own market value would rise.

It’s all about that debt

Almost four years after the deal closed, Dell is still struggling to figure out how to handle all the debt, and in a weak economy, that’s an even bigger challenge now. At some point, it would make sense for Dell to cash in some of its valuable chips, and its most valuable one is clearly VMware.

Nothing is imminent because of the five-year tax break business, but could something happen? September 2021 is a long time away, and a lot could change between now and then, but on its face, VMware offers a good avenue to erase a bunch of that outstanding debt very quickly and get Dell on much firmer financial ground. Time will tell if that’s what happens.

Mar
10
2020
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Dell spent $67B buying EMC — more than 3 years later, was it worth the debt?

Dell’s 2015 decision to buy EMC for $67 billion remains the largest pure tech deal in history, but a transaction of such magnitude created a mountain of debt for the Texas-based company and its primary backer, Silver Lake.

Dell would eventually take on close to $50 billion in debt. Years later, where are they in terms of paying that back, and has the deal paid for itself?

When EMC put itself up for sale, it was under pressure from activist investors Elliott Management to break up the company. In particular, Elliott reportedly wanted the company to sell one of its most valuable parts, VMware, which it believed would help boost EMC’s share price. (Elliott is currently turning the screws on Twitter and SoftBank.)

Whatever the reason, once the company went up for sale, Dell and private equity firm Silver Lake came ‘a callin with an offer EMC CEO Joe Tucci couldn’t refuse. The arrangement represented great returns for his shareholders, and Tucci got to exit on his terms, telling Elliott to take a hike (even if it was Elliott that got the ball rolling in the first place).

Dell eventually took itself public again in late 2018, probably to help raise some of the money it needed to pay off its debts. We are more than three years past the point where the Dell-EMC deal closed, so we decided to take a look back and see if Dell was wise to take on such debt or not.

What it got with EMC

Feb
27
2020
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DocuSign acquires Seal Software for $188M to enhance its AI chops

Contract management service DocuSign today announced that it is acquiring Seal Software for $188 million in cash. The acquisition is expected to close later this year. DocuSign, it’s worth noting, previously invested $15 million in Seal Software in 2019.

Seal Software was founded in 2010, and, while it may not be a mainstream brand, its customers include the likes of PayPal, Dell, Nokia and DocuSign itself. These companies use Seal for its contract management tools, but also for its analytics, discovery and data extraction services. And it’s these AI smarts the company developed over time to help businesses analyze their contracts that made DocuSign acquire the company. This can help them significantly reduce their time for legal reviews, for example.

“Seal was built to make finding, analyzing, and extracting data from contracts simpler and faster,” Seal Software CEO John O’Melia said in today’s announcement. “We have a natural synergy with DocuSign, and our team is excited to leverage our AI expertise to help make the Agreement Cloud even smarter. Also, given the company’s scale and expansive vision, becoming part of DocuSign will provide great opportunities for our customers and partners.”

DocuSign says it will continue to sell Seal’s analytics tools. What’s surely more important to DocuSign, though, is that it will also leverage the company’s AI tools to bolster its DocuSign CLM offering. CLM is DocuSign’s service for automating the full contract life cycle, with a graphical interface for creating workflows and collaboration tools for reviewing and tracking changes, among other things. And integration with Seal’s tools, DocuSign argues, will allow it to provide its customers with a “faster, more efficient agreement process,” while Seal’s customers will benefit from deeper integrations with the DocuSign Agreement Cloud.

Feb
27
2020
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DocuSign acquires Seal Software for $188M to enhance its AI chops

Contract management service DocuSign today announced that it is acquiring Seal Software for $188 million in cash. The acquisition is expected to close later this year. DocuSign, it’s worth noting, previously invested $15 million in Seal Software in 2019.

Seal Software was founded in 2010, and, while it may not be a mainstream brand, its customers include the likes of PayPal, Dell, Nokia and DocuSign itself. These companies use Seal for its contract management tools, but also for its analytics, discovery and data extraction services. And it’s these AI smarts the company developed over time to help businesses analyze their contracts that made DocuSign acquire the company. This can help them significantly reduce their time for legal reviews, for example.

“Seal was built to make finding, analyzing, and extracting data from contracts simpler and faster,” Seal Software CEO John O’Melia said in today’s announcement. “We have a natural synergy with DocuSign, and our team is excited to leverage our AI expertise to help make the Agreement Cloud even smarter. Also, given the company’s scale and expansive vision, becoming part of DocuSign will provide great opportunities for our customers and partners.”

DocuSign says it will continue to sell Seal’s analytics tools. What’s surely more important to DocuSign, though, is that it will also leverage the company’s AI tools to bolster its DocuSign CLM offering. CLM is DocuSign’s service for automating the full contract life cycle, with a graphical interface for creating workflows and collaboration tools for reviewing and tracking changes, among other things. And integration with Seal’s tools, DocuSign argues, will allow it to provide its customers with a “faster, more efficient agreement process,” while Seal’s customers will benefit from deeper integrations with the DocuSign Agreement Cloud.

Feb
18
2020
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Dell sells RSA to consortium led by Symphony Technology Group for over $2B

Dell Technologies announced today that it was selling legacy security firm RSA for $2.075 billion to a consortium of investors led by Symphony Technology Group. Other investors include Ontario Teachers’ Pension Plan Board and AlpInvest Partners.

RSA came to Dell when it bought EMC for $67 billion in 2015. EMC bought the company in 2006 for a similar price it was sold for today, $2.1 billion. The deal includes several pieces, including the RSA security conference held each year in San Francisco.

As for products, the consortium gets RSA Archer, RSA NetWitness Platform, RSA SecurID, RSA Fraud and Risk Intelligence — in addition to the conference. At the time of the EMC acquisition, in a letter to customers, Michael Dell actually called out RSA as one of the companies he looked forward to welcoming to the Dell family after the deal was completed:

I am excited to work with the EMC, VMware, Pivotal, VCE, Virtustream and RSA teams, and I am personally committed to the success of our new company, our partners and above all, to you, our customers.

Times change however, and perhaps Dell decided it was simply time to get some cash and jettison the veteran security company to go a bit more modern, as RSA’s approach no longer aligned with Dell’s company-wide security strategy.

“The strategies of RSA and Dell Technologies have evolved to address different business needs with different go-to-market models. The sale of RSA gives us greater flexibility to focus on integrated innovation across Dell Technologies, while allowing RSA to focus on its strategy of providing risk, security and fraud teams with the ability to holistically manage digital risk,” Dell Technology’s chief operating officer and vice chairman Jeff Clarke, wrote in a blog post announcing the deal.

Meanwhile, RSA president Rohit Ghai tried to put a happy spin on the outcome, framing it as the next step in the company’s long and storied history. “The one constant in every episode of our existence has been our focus on the success of our customers and our ability to endure through market disruption by innovating on behalf of our customers,” he wrote in a blog post on the RSA company website.

The deal is subject to the normal kinds of regulatory approval before it is finalized.

Dec
30
2019
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VMware completes $2.7 billion Pivotal acquisition

VMware is closing the year with a significant new component in its arsenal. Today it announced it has closed the $2.7 billion Pivotal acquisition it originally announced in August.

The acquisition gives VMware another component in its march to transform from a pure virtual machine company into a cloud native vendor that can manage infrastructure wherever it lives. It fits alongside other recent deals like buying Heptio and Bitnami, two other deals that closed this year.

They hope this all fits neatly into VMware Tanzu, which is designed to bring Kubernetes containers and VMware virtual machines together in a single management platform.

“VMware Tanzu is built upon our recognized infrastructure products and further expanded with the technologies that Pivotal, Heptio, Bitnami and many other VMware teams bring to this new portfolio of products and services,” Ray O’Farrell, executive vice president and general manager of the Modern Application Platforms Business Unit at VMware, wrote in a blog post announcing the deal had closed.

Craig McLuckie, who came over in the Heptio deal and is now VP of R&D at VMware, told TechCrunch in November at KubeCon that while the deal hadn’t closed at that point, he saw a future where Pivotal could help at a professional services level, as well.

“In the future when Pivotal is a part of this story, they won’t be just delivering technology, but also deep expertise to support application transformation initiatives,” he said.

Up until the closing, the company had been publicly traded on the New York Stock Exchange, but as of today, Pivotal becomes a wholly owned subsidiary of VMware. It’s important to note that this transaction didn’t happen in a vacuum, where two random companies came together.

In fact, VMware and Pivotal were part of the consortium of companies that Dell purchased when it acquired EMC in 2015 for $67 billion. While both were part of EMC and then Dell, each one operated separately and independently. At the time of the sale to Dell, Pivotal was considered a key piece, one that could stand strongly on its own.

Pivotal and VMware had another strong connection. Pivotal was originally created by a combination of EMC, VMware and GE (which owned a 10% stake for a time) to give these large organizations a separate company to undertake transformation initiatives.

It raised a hefty $1.7 billion before going public in 2018. A big chunk of that came in one heady day in 2016 when it announced $650 million in funding led by Ford’s $180 million investment.

The future looked bright at that point, but life as a public company was rough, and after a catastrophic June earnings report, things began to fall apart. The stock dropped 42% in one day. As I wrote in an analysis of the deal:

The stock price plunged from a high of $21.44 on May 30th to a low of $8.30 on August 14th. The company’s market cap plunged in that same time period falling from $5.828 billion on May 30th to $2.257 billion on August 14th. That’s when VMware admitted it was thinking about buying the struggling company.

VMware came to the rescue and offered $15.00 a share, a substantial premium above that August low point. As of today, it’s part of VMware.

Aug
23
2019
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How Pivotal got bailed out by fellow Dell family member, VMware

When Dell acquired EMC in 2016 for $67 billion, it created a complicated consortium of interconnected organizations. Some, like VMware and Pivotal, operate as completely separate companies. They have their own boards of directors, can acquire companies and are publicly traded on the stock market. Yet they work closely within Dell, partnering where it makes sense. When Pivotal’s stock price plunged recently, VMware saved the day when it bought the faltering company for $2.7 billion yesterday.

Pivotal went public last year, and sometimes struggled, but in June the wheels started to come off after a poor quarterly earnings report. The company had what MarketWatch aptly called “a train wreck of a quarter.”

How bad was it? So bad that its stock price was down 42% the day after it reported its earnings. While the quarter itself wasn’t so bad, with revenue up year over year, the guidance was another story. The company cut its 2020 revenue guidance by $40-$50 million and the guidance it gave for the upcoming 2Q 19 was also considerably lower than consensus Wall Street estimates.

The stock price plunged from a high of $21.44 on May 30th to a low of $8.30 on August 14th. The company’s market cap plunged in that same time period falling from $5.828 billion on May 30th to $2.257 billion on August 14th. That’s when VMware admitted it was thinking about buying the struggling company.

Aug
14
2019
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VMware says it’s looking to acquire Pivotal

VMware today confirmed that it is in talks to acquire software development platform Pivotal Software, the service best known for commercializing the open-source Cloud Foundry platform. The proposed transaction would see VMware acquire all outstanding Pivotal Class A stock for $15 per share, a significant markup over Pivotal’s current share price (which unsurprisingly shot up right after the announcement).

Pivotal’s shares have struggled since the company’s IPO in April 2018. The company was originally spun out of EMC Corporation (now DellEMC) and VMware in 2012 to focus on Cloud Foundry, an open-source software development platform that is currently in use by the majority of Fortune 500 companies. A lot of these enterprises are working with Pivotal to support their Cloud Foundry efforts. Dell itself continues to own the majority of VMware and Pivotal, and VMware also owns an interest in Pivotal already and sells Pivotal’s services to its customers, as well. It’s a bit of an ouroboros of a transaction.

Pivotal Cloud Foundry was always the company’s main product, but it also offered additional consulting services on top of that. Despite improving its execution since going public, Pivotal still lost $31.7 million in its last financial quarter as its stock price traded at just over half of the IPO price. Indeed, the $15 per share VMware is offering is identical to Pivotal’s IPO price.

An acquisition by VMware would bring Pivotal’s journey full circle, though this is surely not the journey the Pivotal team expected. VMware is a Cloud Foundry Foundation platinum member, together with Pivotal, DellEMC, IBM, SAP and Suse, so I wouldn’t expect any major changes in VMware’s support of the overall open-source ecosystem behind Pivotal’s core platform.

It remains to be seen whether the acquisition will indeed happen, though. In a press release, VMware acknowledged the discussion between the two companies but noted that “there can be no assurance that any such agreement regarding the potential transaction will occur, and VMware does not intend to communicate further on this matter unless and until a definitive agreement is reached.” That’s the kind of sentence lawyers like to write. I would be quite surprised if this deal didn’t happen, though.

Buying Pivotal would also make sense in the grand scheme of VMware’s recent acquisitions. Earlier this year, the company acquired Bitnami, and last year it acquired Heptio, the startup founded by two of the three co-founders of the Kubernetes project, which now forms the basis of many new enterprise cloud deployments and, most recently, Pivotal Cloud Foundry.

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