[chollida1]

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 me know, but given that this is a 38% premium over what RAX was trading at when the deal leaked on august 3rd, this is almost best case for rack space employee's and given that this is an all cash transaction they should get some liquidity out of the deal!!

Given that the RAX board unanimously approved the deal, I'm going to guess this is going through.

Often when a company is brought private by a PE firm they'll combine it with other portfolio companies before spinning it back out. I don't see any relevant companies in Apollo's portfolio that could be joined to RAX.

If you are wondering who in wall street makes money on these types of deal, its the usual suspects. Everyone wets their beak in take over transactions:)

- Financing provided by Citi, Deutsche, Barclays, RBC;

- Goldman advised RAX, Morgan Stanley also provided services in connection w/ deal; Citi, Deutsche, Barclays, RBC advised Apollo

[calgoo]

I work for a relatively big European Network Provider and hoster who got privatized last year. Its not all horrible, but there is a lot of BS going around all the time. The worst are the rumors. You try not to listen to them, but when you are not sure if you have a job in 3 months, and you have spent at least a year more less in the same place, it does get to you. The word from above normally talks a lot of cost cutting and Sales! Sales! Sales!, which makes everyone else who is not part of Sales feel even more left out, as if their jobs are not important.

When people start saying things like: "I don't care, but just tell me if I have a job or not" things are bad. The job market is still bad here in Spain, so a good paying job is hard to get these days. That means a lot of people stick around just for the financials.

I have found some small personal opportunities as well, such as being able to work more from home, making changes in my area regarding things such as legacy products, but anything that costs money is normally out of the question.

[Ecio78]

I am sorry to read about is, I think I know which provider you are talking about based on some details you provided, and I can only say good things about the services (phone and network) when I used them in Italy (2005-2011). At that time it was considered one of the best, and also used to hired the best. I heard it started going worse with good people leaving around the end of that period, it seems it's not going better..

[whateverdudes]

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.

[dave_sullivan]

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, and all/most available company cashflow is diverted to paying off that loan. The ideal company is one with reliable cashflows and access to a growing market (of which I'd say a large cloud infrastructure provider fits the profile).

To improve cashflow: pay fewer people less, convert assets to cash, and/or make more money from your core business. Usually a mix of the three.

From an organizational standpoint, you can think of it like Rackspace just took out a very large (maybe subprime) mortgage on the company and some new people are going to try to make sure that doesn't turn out to be a horrible bet, first for the investors, then for the company.

[narrator]

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 former than the latter, mainly because it takes some uncommonly smart people to run the latter kind of fund and just a bunch of bean counting jerks to the run the former kind.

[rat_1234]

Your first example is very old school thinking. When a company 'craters' it's not like everyone gets off scott free. All of the people holding the debt, usually big, savvy banks, with the senior tranches of debt have gotten wise to this sort of behavior. And when I say they've gotten wise to it, I mean they got wise to it 20 years ago. In short, if you want to load it up with debt that the company will never pay back and give yourself a big dividend you first have to find someone to lend you that money. If it's obvious to you that that's a bad idea it's obvious to the banks as well.

Most exits in PE are either going public (in which case you have to convince the equity markets that the company is stable), selling to a strategic buyer (e.g., if Apple were to buy RAX from Apollo), or even selling to another PE firm which happens all of the time.

The point is that neither of these scenarios turn out well if you are levering a company up to an unsustainable capital structure.

[r00fus]

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

[frakr]

They own for-profit education companies like University of Phoenix. Read up on their history, especially the law suits, to get an idea of what the management's values are like: https://en.wikipedia.org/wiki/University_of_Phoenix

[dfriedmn]

That's actually a different firm called Apollo Group (which is mostly comprised of Phoenix and a small number of other things) – Apollo Global is a much larger private equity firm with a confusingly similar name

[rattray]

"management's values" are probably "make money" even for the turnaround PR firms.

The real question is of "strategy", not "values", in the financial industry.

Anyone have a tl;dr for Apollo on that?

[ansible]

Ugh, those guys.

So... this is not good news for the customers of Rackspace.

[e15ctr0n]

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

[godzillabrennus]

I looked into the PE model after meeting a VC firm GP who wanted to find a way to crash that model into the VC model. Dave explained the formula real well but I've also see that a PE firm will sometimes try and raise additional debt financing to grow the business after it purchases the business with debt. Basically the wager is that they can fuel growth (sales) quickly and sell out for a high enough multiple that they make a ton of money in a relatively short period of a few years.

This works in the PE world because these are businesses that have credit and can get debt financing. The typical VC backed company can't get debt financing because they are too risky (early stage) for a traditional lender. That basically but an end to that VC's plan.

[NetStrikeForce]

Nice explanation.

What if the people that got the mortgage for the house just want to make it pretty an resell it? I guess that's the fear here, when the buyer is an investment company (house flipper) and not a technology company that wants to increase their market share or add technology / talent to their portfolio.

[shostack]

And isn't that usually the case with PE? Are there any good examples of them NOT doing this?

[ottodidakt]

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?

[charlesdm]

Debt exists in certain tranches, i.e. there will be low interest secured debt, and higher interest unsecured debt. Banks tend to only lend secured debt against assets and/or cashflow. Unsecured debt is often offered by hedge funds (i.e. 6-8-10% instead of 2-4-5%) and is paid down first.

Why do banks love PE deals? Easy: they make a ton of money off of these deals, with moderate risk. If the business goes under, they are first in line to be compensated. If they make 4% on a $500m loan, that's $20m a year.

[frik]

Thanks for the insightful explanation!

What do PE companies do with more than one company with kind of dated offerings in the same/similar niche?

Reduce the fat, merge them and sell them to a large company?

E.g. Qlik, Riverbed and Dynatrace https://thomabravo.com/portfolio/all/current/

[postgeographic]

Yeah, that's called a buy-and-build strategy, or a bolt-hole strategy. A large number of industries or market segments that are fragmented end up consolidating this way. For example, Lumison is a data center business here in the UK, and they got bought out by Bridgepoint Development Capital. Subsequently BDC and Lumison went on to buy a few other data centers, making one larger data center with the attendant economies of scale

[gaius]

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.

[kiallmacinnes]

Honest question: if it's that easy, why isnt everyone doing it?

[charlesdm]

1. You need to find a lender willing to lend you most of the acquisition capital.

2. You also need someone to put up the initial equity capital.

3. You need to find a viable company to be acquired that won't crash immediately upon acquisition, and it can't be too expensive. Your first goal is to recover your equity investment. Everything after that is basically profit.

4. Frankly, 99.9% of people have ethical issues (you risk the jobs of 100s of people by overleveraging) with PE deals or don't have the skills and/or intelligence (managing the financial side + running/growing a business is hard) to be able to execute a deal like that.

If all you care about is making money, then private equity is probably one of the "easiest" ways to build wealth (for yourself, that is). At the end of the day, it's nothing more than buying a companies with a huge loan. There are some billionaire entrepreneurs who have used LBOs as their "empire building" tactic, i.e. Rupert Murdoch, John Malone, etc.

Also, check out Amaya Gaming. Classic LBO play done by an entrepreneur.

[gaius]

It's one of those things that's easy if you're of the right class and have the right contacts. Another example would be Holmes raising billions for Theranos through people who were all friends of her family. You need to know the right people to stake you the initial sum (and who will collect their fee for doing so). A few years at a big bank, then Harvard Business School should do it. Oh and also you need to be completely amoral.

[wpietri]

The NYT did a good piece a few years back on how private equity firms totally destroyed Simmons, a mattress company:

http://www.nytimes.com/2009/10/05/business/economy/05simmons...

Basically, in theory the best way to make money is to serve your customers well. But in practice, financial engineering creates a lot of opportunities where those diverge. This is hard on employees, who value non-financial things like stability and meaning in their work.

[shostack]

I'd say employees certainly value financial things and that "recurring revenue" from their paycheck is one of them. Liquidity events from a transaction would be another. Unfortunately they typically lose the former and almost certainly never get the latter in a PE deal.

[wpietri]

I'm not denying the financial angle. But people value job stability beyond the pure impact on their bank account. Even if you know you can switch to another job immediately, the worry that you could be laid off at any moment is unpleasant for many.

[archildress]

The hallmark of being owned by private equity is slashes t every controllable expense, running supremely lean and generally aligning with short term rewards.

Private equity groups don't make money from holding businesses, typically. They make the serious returns when they sell a business to a larger company. Keeping expenses low increases margins and drives the best returns.

The problem is that PE management aligns with short term incentive, which is especially difficult for a tech company where value is often derived from high investment into new and emerging technologies.

[JDDunn9]

You have it backwards. It's activist investors (a.k.a. corporate raiders) that push for short-term improvements in the stock market. Investing in long term growth has been a common reason companies went private. While flipping under-valued companies was popular in the 80's, those days of easy pickings are long gone. Private equity is highly competitive today, and you have to have some real management skill to make money (known as "alpha" in the biz).

[coredog64]

One fairly recent example of this in the software business is TIBCO. They were making stupid short-term decisions to satisfy investors. The theory was that going private would allow them to reorganize the business and focus on core competencies without second-guessing by investors.

That or it was just a way for Vivek Ranadive to get the maximum payout for his equity stake so that he could focus on running his NBA team.

As a side note, I went to the annual TIBCO conference right before the buyout and it was pretty clear there that Vivek didn't give a wet rat's rear about TIBCO or software anymore and just wanted to spend his day being an NBA owner.

[frogfuzion]

The easiest and quickest way for the Private Equity company to make your business more profitable is through layoffs. They eventually want to sell the company to make a profit for their investors. In many cases this requires layoffs.

[srunni]

If you want to know more about PE firms and LBOs, check out the book Barbarians at the Gate: The Fall of RJR Nabisco: https://www.amazon.com/gp/aw/d/0061655554

[roel_v]

It's a fun read but not very technical, or rather, not technical at all. It's a story, I didn't learn anything about finance or business strategy from it.

[srunni]

Right, it's good for a weekend read. I wouldn't say it's completely devoid of educational value. It's interesting to see how Johnson manages his board relationships, as well as the details of the bidding process and how difficult it can be to form partnerships.

The late 80s were definitely a different time, though - the amount of money needed for the RJR LBO is much more easily accessible to people in similar positions in 2016. As of June 30th, KKR's AUM is $131B, while Blackstone is at $356B.

Another good read on PE is King of Capital (https://www.amazon.com/dp/0307886026).

If you're interested in learning the technical details of corporate finance, you're probably best off starting with something like the Coursera class Introduction to Corporate Finance (https://www.coursera.org/learn/wharton-finance), and then reading the textbooks referenced by the course for a more in-depth understanding.

[beachstartup]

i read this book, it's good. i got the overwhelming feeling that once started, the buyout process is outside of any one person or group's control. it takes on a life of its own.

[Cymen]

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.

[monkmartinez]

It doesn't seem so hard to figure out. The problem is the company is now just part of a portfolio that needs to perform to a certain level. The level of uncertainty with respect to Rackspace just increased 1000% both internally and externally. To me, private equity is a vote of no-confidence.

Personally, I fall into the group that thinks private equity is probably bad for the economy in general.

[pasbesoin]

Look up the terms "profit center" and "cost center". As soon as you hear your area being described as a "cost center", start looking for another job.

[wpietri]

It's such a great example of how accounting drives insane decisions. I will die happy if I can get people to stop thinking in terms of profit vs cost and instead think in terms of value and waste, as the Lean Manufacturing people do.

[yazr]

A typical PE buys the company with 20% cash down, and 80% debt (i.e. money borrowed from a bank).

They now have to find extra profit to pay the interest. Ideally they also get a healthy dividend or management fee every year.

This inevitably comes down to a. increased sales b. cost (i.e. salary) cuts

They also want to resell/IPO the company in 3-7 years - obviously for money than they paid for it. This is another constant pressure to increase profit (see a & b above).

HOWEVER Growing companies are usually not for sale and are very expensive. They cant be bought by PE. PE often looks for a troubled company which can be bought on the cheap, and can be somehow be kept profitable for a few years.

Hence (a) is difficult leading to focus on (b)

This of course is not all bad. Some academic studies have shown that PE companies do grow over time. The new management can trim the middle management roles and invest more in real r&d and product. YMMV

[nullcipher]

Let me guess.. media.net?

[coredog64]

Since all the other comments are negative, I'll chime in with a somewhat positive experience with a PE firm (although it wasn't a complete going private move).

I worked at OnSemi during the period that TPG was a significant investor. Initially they did enforce some fairly strict standards about how money could be spent. And there was a lot of BS where the quarterly numbers were almost enough to beat the street and so employees were forced to take accrued vacation. However, at the end of the holding period, TPG moved from a "lipstick on the pig" strategy to one of making OnSemi a better company and loosened the purse strings.

[hga]

Hmmm, in another domain I'm familiar with, Cerberus Capital Management smushed together a number of firearms and ammo companies into the Freedom Group (https://en.wikipedia.org/wiki/Freedom_Group), and without to my knowledge screwing them up.

That said, Remington Arms is still a sub-par manufacturer of guns, they haven't noticeably improved their quality, or behavior when caught out, see e.g. the lawsuit they continue to lose WRT to their unsafe Model 700 rifle safeties.

[monkmartinez]

Most of the "freedom group" make the same thing or operate in the same space. That is "tacti-cool" and people that want their names on lists for silencers, SBR's and other goodies they make.

I bet there was a crap-ton of consolidation that we didn't hear about. I bet a lot of people lost jobs in said consolidation.

[hga]

No, not really. Only one of their companies is inherently into NFA items, and H&R and Marlin, which bought them prior to it being bought by Freedom, and Dakota and Parker (!) aren't even into those sorts of guns. And Barnes only makes ammo and especially bullets. (Para USA makes double stack 1911s, which are technically "assault weapons" due to the increased magazine capacities, but based on an 106 year old design.) Only Advanced Armament Corporation (silencers), Bushmaster, DPMS, TAPCO (accessories) sell such items, and maybe you'd count Remington's hunting configured and camouflaged AR-10 and AR-15 pattern rifles, but that makes them the antithesis of "tacti-cool".

The loss of jobs from the consolidations are well known, plus overlaid with that is Remmington moving more and more stuff out of high cost, unionized, viciously anti-gun New York state, away from their original factory, where they were the first who's still in business to make arms in the US (or so they say, e.g. https://en.wikipedia.org/wiki/Remington_Arms and it's certainly a very old company and that complex is obviously very old).

ADDED: Without consolidation, it's entirely likely one or more of the traditional hunting arms companies Marlin, Dakota and/or Parker would have gone out of business like H&R did, there's much less Gun Culture 1.0 demand for such, and plenty of fine used specimens available.

Remington might have been less likely to do that if still under their original management, on the other hand, under Cerberus they were the first US ammo manufacturer to respond to the 2008 and on ammo shortage by buying new capital equipment to set up new production lines, which is not supposed to be the usual MO of private equity owned firms.

So my point is that these consolidated companies' products haven't, to my knowledge, suffered from the process, whereas a lot of us fear Rackspace's offerings will suffer (well, even more than they do today, one reason we can be pretty sure they put themselves up for sale).

ADDED: On the other hand, Zilkha & Co, which bought 85% of Colt, is raping it up, down, right and left, the very worst sort of this type of thing.

[zymhan]

Isn't this deal similar to Dell going private?

I can certainly imagine how it might not end well for a company that gets taken private, but I also think that trying to innovate and grow in such a competitive environment would be even harder if you have to worry about shareholders breathing down your neck.

[AndyNemmity]

Dell going private with it's original owner is very different than a portfolio company taking a company private.

[zymhan]

Ah, yes, that's a good point.

[nowbacktowork]

I believe the rumor is they are going to buy hpe after their spin off/merge with CSC. There might be an opportunity there.

[grub5000]

Jesus Christ when will this end. I work for HPE and everything is constantly on hold, waiting for these split offs, mergers, new financial year etc. Cant get any travelling or training done. No internal moves. Staff quitting left right and centre. I'm tempted to join them