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Apollo (APO) Investors Seem Bullish on Rackspace (RAX) Deal

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The stock price of Apollo Global Management (APO - Free Report) , a private equity operator, gained about 1.4% since it signed a definitive agreement to acquire struggling cloud provider Rackspace Hosting, Inc. on Aug 26.

The $4.3 billion deal, which is expected to close in the fourth quarter of this fiscal year (subject to customary approvals), includes assumption of $43 million of net cash. This is based on Apollo’s offer of $32 per share cash consideration.

Rumors about various private equity firms seeking to takeover Rackspace surfaced in the market. Rackspace’s stock price started reacting on Aug 4 with the speculation of a potential deal. The $32 per share cash consideration represents a premium of 38% on Rackspace’s unaffected closing price on Aug 3.

Although the deal value of $4.3 billion seems high, it is actually reasonable considering Rackspace’s historic performance. In early 2013, Rackspace was counted as a hot stock because of its solid business performance.  However, in recent years Rackspace has been struggling to compete with big players like Amazon, Microsoft and Google, to sustain its leadership in public cloud. But in Aug 2016, it bounced 29% amid the takeover rumor.

What Made Apollo Bet on Rackspace?

The deal is in line with Apollo’s strategy to focus more on the technology sector. In Feb 2016, Apollo acquired ADT Corporation, a security services company, for approximately $15 billion. Also, in 2015, Apollo acquired Presidio, an information technology consulting company.
 
Apollo is recognized for making investments across industries where it has considerable knowledge and resources. With Rackspace’s skilled manpower and commitment to deliver expertise and exceptional service for the leading cloud platforms across the world, Apollo is destined to enhance its footprint in delivering strong long-term investment performance. The transaction is expected to be an upside for Apollo, as it will be able to grow and transform itself at its own pace.

Currently, Apollo Global Management carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space include Virtus Investment Partners, Inc (VRTS - Free Report) sporting a Zacks Rank #1 (Strong Buy), and Eaton Vance Corp. (EV - Free Report) with a Zacks Rank #2 (Buy).

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