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Apollo Is Negotiating a Deal to Buy Cloud Company Rackspace

Key Speakers At The 2016 Milken ConferenceKey Speakers At The 2016 Milken Conference
Leon Black, chairman and CEO of Apollo Global Management, speaks during the annual Milken Institute Global Conference in Beverly Hills, Calif., on May 2, 2016.Photograph by Patrick T. Fallon/Bloomberg via Getty Images

Apollo Global Management (APO) is in discussions to acquire U.S. cloud services provider Rackspace Hosting (RAX), people familiar with the matter said, as the buyout firm seeks to step up its investments in the technology sector.

Apollo is negotiating a price of more than $3.5 billion for Rackspace, the sources said on Friday. Rackspace has explored a sale several times since it announced it was working with Morgan Stanley (MS) to explore strategic alternatives two years ago. There is no certainty that the latest round of talks will result in a deal, the people cautioned.

The sources asked not to be identified because the negotiations are confidential. Apollo and Rackspace declined to comment.

Shares of Rackspace started trading in New York on Friday up 14 percent at $30.21 after the Wall Street Journal reported on Thursday that one or more unidentified private equity firms were in advanced talks to acquire Rackspace, and that a deal could be reached as soon as this week.

Following the Reuters report, Rackspace’s shares traded at $29.47, up 11 percent later Friday, giving the company a market capitalization of $3.7 billion.

Apollo, a private equity and credit investment firm with $186 billion in assets, has traditionally invested in companies in the industrial, media, communications, consumer, retail, energy, services and healthcare sectors.

But it has gradually been stepping up technology investments. Last year, Apollo acquired Presidio, an information technology consulting company.

Rackspace, which leases server space and helps corporations store and access data in the cloud, has struggled to grow in the face of competition from aggressive startups as well as established players like Microsoft (MSFT) and IBM (IBM).

A pioneer in providing website hosting services to companies, Rackspace has made gains in the cloud business in the last two years.

The company’s adjusted earnings before interest, taxes, depreciation and amortization rose to $678 million last year, from $503.5 million in 2013.

Blue Harbour Group, an activist hedge fund, is Rackspace’s third largest shareholder with a 9.4 percent stake, according to the most recent Thomson Reuters data. It first built a position in Rackspace in 2014.

Apollo has taken several companies private this year, including security services company ADT, which it merged with its existing portfolio company Protection 1 in a deal worth $15 billion, making it this year’s largest leveraged buyout.