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Cisco Buying Rackspace Would Boost Both Companies

NEW YORK (TheStreet) -- At the end of its most recent quarter, Cisco (CSCO - Get Report) had $50 billion in cash on the balance sheet and another $13 billion in operating cash flow. So there's very little that the networking giant can't afford. But the company has struggled with growth.

That, however, has not stopped investors from wondering "what if?" With the stock closing Monday at $25.23, shares are now up roughly 13% on the year to date.

Although growth has come in limited supply, Cisco's cash position and its strong 3.10% yield makes it tough to overlook the stock. For this reason, and the renewed confidence of investors, Cisco can't afford to pass up on an opportunity to grow its cloud presence. A deal for Rackspace Hostings (RAX - Get Report) is what the doctors orders for Cisco's future and its stock.

Cisco has the cash and Rackspace is motivated to sell. Back in May, Rackspace management disclosed it has fielded M&A overtures from several companies. Some of which also expressed a desire to form strategic partnerships.

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I can only speculate on which companies these might have been. Calls and emails to Rackspace representatives were not immediately returned.

While Rackspace does have a strong base of customers willing to shell out the cash it needs to grow its business its high-end outsourced cloud service model, competition from the likes of Amazon (AMZN), Google (GOOG) and VMware (VMW) (among others) are making it tough for Rackspace to compete.

This, however, legitimizes Rackspace's business model and lends credence to why it is an attractive target. With its market cap right around $5 billion and its $71 million debt, Cisco only needs to shell out $7.5 billion (50% premium) to get this deal done. Essentially, for less than 12% of Cisco's combined cash and operating cash flow, Cisco would instantly become a feared cloud rival to Amazon, Google and IBM (IBM).

What we've come to know as "the cloud" is evolving. OpenStack is the new battleground. It is the term used to describe a worldwide collaboration of developers and cloud-computing experts who are working together on an open-source platform. The goal is to advance the public and private clouds.

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