Investors Jump from Rackspace as Review Ends With No Deal

NEW YORK (The Deal) -- Shareholders of Rackspace Hosting (RAX)  received two disappointing pieces of news after the close on Tuesday. Not only will Rackspace terminate its review without a sale, the company also will not buy back shares as an alternative.

New CEO Taylor Rhodes said Rackspace could even be a buyer.

The cloud vendor's stock plummeted $6.29, or 16%, to $33.05 on Wednesday morning, as investors who had purchased Rackspace in anticipation of a sale dumped their positions.

"From our perspective, the real disappointment in the release was the lack of a share buyback, which we admittedly thought would be a potential catalyst for the stock," Gray Powell of Wells Fargo Securities  (WFC) wrote in a Wednesday note.

Rackspace could repurchase $900 million in shares while keeping its leverage below a single multiple of Ebitda, Powell suggested.

Activists already hold the stock, with Blue Harbour Group disclosing a position in August. Rackspace could face shareholder pressure to return cash to investors. Asked why the company did not buy back shares when it trades at 6.5 times Ebitda, Rhodes said it was "improper for a growth company ... to take on debt to buy back shares."

The company will hold onto its cash to "preserve our financial flexibility," Rhodes said, adding that Rackspace could make acquisitions to speed its growth.

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