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.
Overall though, Walravens says Rackspace has been a "home run" of a company and he sees plenty of upside as OpenStack continues to gain prominence as a market alternative to Amazon Web Services. The more companies coalesce around OpenStack, the more opportunity down the line Rackspace will have to provide support services around the project. Eventually, he says, Rackspace data centers could be an option for smaller companies within the OpenStack ecosystem to host their services from, creating an ongoing revenue stream for Rackspace. Meanwhile, as Rackspace has embraced OpenStack on its back end, Walravens says it has now increased its capacity to handle large-scale cloud computing projects that may have been typically only handled by Amazon Web Services. Bigger deals mean more revenue, and more opportunity to continue its M&A strategy.
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.
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