Why Blue Harbour Sees Value in Rackspace

Updated from 10:59 a.m. to reflect that Blue Harbor started buying Rackspace in May, not June.

NEW YORK (TheStreet) -- Hedge fund Blue Harbour Group believes managed cloud company Rackspace (RAX) is undervalued and can buy back a significant amount of stock as the company distinguishes its business model from larger competitors such as Amazon Web Service (AMZN) . Blue Harbour began buying Rackspace shares in May before Rackspace said it hired Morgan Stanley to run a strategic review, however, the bulk of the firm's accumulation happened through June, July and August.

While Blue Harbour believes Rackspace's business would be complementary to a handful of acquirers over the long-term, it also thinks the company's standalone prospects in the cloud computing market present a value to investors. Blue Harbour expects Rackspace will generate $2 billion in recurring revenue by 2015, indicating a return to steady revenue growth amid a change in strategy that emphasizes the company's service, in addition to its cloud infrastructure capabilities.

Rackspace, after failing to win cloud hosting market share from Amazon Web Service amid a pricing battle, is working to re-emphasize its customer service, in a move that may underscore its differentiated offering to smaller businesses without a large IT infrastructure. Earlier in 2014, Rackspace changed its pricing to split infrastructure and service costs for customers. That change appears to have buoyed Rackspace's recent earnings and its outlook for coming quarters. 

Read More: Change Looms at Babcock and Wilcox as Blue Harbour Takes Stake

If you liked this article you might like

Rackspace Confirms Departure of COO Roenigk

Largest U.S. Banks Bullish About M&A Despite Lackluster 2016

F5 Networks May Catch Activist Investor Attention Amid Sector Consolidation

Tech Deals Propel Wachtell, Wilson Sonsini to Big Third Quarter

Oracle Continues Its All-Out Push Into the Cloud, but Amazon and Others Aren't Standing Still