Apollo Global is buying Rackspace for $4.3B (opens in new tab)

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.

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.

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.

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.

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

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

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.

I also feel like they don't communicate maintenance windows or outages as well as they should.

But I still use them because they have a Dallas location and DO doesn't.

Not affiliated with either, just really knowledgable of the industry.

I believe the "not terribly good shape" is a measurement that's _relative_ to other competitors in the cloud infrastructure market.

Rackspace's yearly revenues ($2 billion) have gone nearly flat[1]. On the other hand, Amazon's AWS has seen so much growth[2] that they now pull more revenue per quarter ($2.5 billion) than Rackspace does for the entire year.

Back in the early 2000s -- before AWS hit the scene, Rackspace hosting was attracting customers with excellent datacenter uptime and "fanatical support"[3]. Those 2 factors are not meaningful enough to the cloud subscribers today which is why Rackspace tried various strategies such as promoting OpenStack (hey don't be locked into proprietary AWS!) and then eventually "consulting services" to help customers use AWS. Neither of those initiatives really moved the needle.

I'm currently a Rackspace customer spending $120 a year for them to host my email but customers like me are part of a dying source of revenue. (Everybody can use GMail for free!).

Rackspace is "mature" instead of being "hot growth" which often translates to "not doing too well".

[1]http://www.marketwatch.com/investing/stock/rax/financials

[2]http://www.statista.com/statistics/250520/forecast-of-amazon...

[3]https://www.rackspace.com/en-us/dedicated-servers/promise

What's left will collapse under the debt load that Apollo stuck it with.

It is a big shame though. Rackspace is one of the few Texas-born companies that managed to strike it big and still have a very egalitarian culture. They have a very interesting culture and I wish it was something that could go on; a lot of my former coworkers absolutely love that environment. But it doesn't look like it will last for much longer.

Short-term results oriented layoffs like this decimated HP under Carly Fiorina, and I don't have a good long-term outlook on VMware, if Dell decides to take a similar approach.