Thoughts on Citrix's potential sale: 2017 Edition. This time it feels different.

Rumors of a company acquiring Citrix appear from time to time, but this time it seems like it might actually happen. Here's my impression of the situation.

If you’ve been around a while, you’ve probably become desensitized to the seemingly yearly chatter that Citrix is going to be acquired by so-and-so. So it was when, last Monday, news dropped via Bloomberg that Citrix had enlisted Goldman Sachs to negotiate a potential sale of the company. My immediate reaction was something on the order of, “Eh. What else is new?”

We mentioned in our Friday Notebook, but after thinking about it for the week there’s something different about it this time. The previous rumors that date back as far as I can remember were usually focused on some other company leading the charge to acquire Citrix. Microsoft always comes up (because without Microsoft there is no Citrix, so Microsoft should just buy them), along with Cisco (Wouldn’t desktop virtualization + NetScaler plug in well to all the other things Cisco does?), Dell (Guess we don’t have to worry about that anymore), and HP (Another one of those “look at all they do…it could fit!” situations).

This time around Citrix is allegedly leading the charge, and that feels decidedly different.

Many will say they saw this coming when Elliott forced their way into the driver’s seat back in 2015. Though I always knew it was a possibility, the things that Elliott was saying (focusing on core, selling off distracting technologies, etc…) were music to my ears and seemed to indicate a Citrix-oriented future. With renewed focus, the two years since Elliott got involved have been very productive.

Then there’s the CEO. Typically, when investors try to fix up a company for a quick sale, they don’t bring in well-known executives with no prior CEO experience. They bring in people that have a history of trimming the fat, streamlining operations, and selling companies. AppSense is a notable example, and their endgame was no secret when they hired Scott Arnold as CEO in 2013. Scott led Borland through a similar process in 2005.

Citrix, on the other hand, hired Kirill Tatarinov, an ex-Microsoft executive with a background in engineering, as CEO. Kirill’s ties to Microsoft no doubt had great influence on the increased partnership with Microsoft, which again would seem to indicate a future trajectory for Citrix.

Why would they be for sale?

Given how things have played out over the past few years, I’m a bit surprised to see that Citrix is shopping itself around. I’d be more surprised, though, if there wasn’t the dark cloud over Citrix’s head that indicates limited growth. Over the last three complete fiscal years (2014-2016), Citrix’s revenue has experienced just 4% growth year over year. Citrix also expects to grow by just 3%-4% this year, too.

By contrast, Amazon is up 17% from 2014-2015, and another 21% from 2015-2016. That’s a huge difference, but if you just look at AWS it’s even more staggering. AWS had $7.88 billion in sales in 2015, and $12.2 billion in 2016, which makes AWS’s growth rate 65% from 2015-2016!

From the “grass is always greener” department, investors in Citrix might be looking around wondering why they get out of bed in the morning.

That said, Citrix isn’t losing money. They’re still profitable, but profitability on Wall Street isn’t as important as growth. Without growth, investors lose confidence. So far, Citrix has kept the stock price propped up by reducing costs and selling off assets (the best example of this is the bump in share price when the sale of GoTo completed). Things look good from that perspective, even though the revenue hasn’t been increasing much at all.

Why wouldn’t Elliott just get out now?

I had to call around to answer this one, since if it’s not obvious by now this topic isn’t exactly in my wheelhouse. The short answer is that though Elliott may own a significant amount of Citrix stock, selling off so much of it right now would immediately devalue it. Potential buyers know this, so why would they buy a whole bunch stock at $81/share that will immediately lose value? Also, who would that buyer even be?

Plus, what would the other investors think if they see the primary investor leaving? They’d think something was up and also want to get out, further driving down the price.

That could be a reason for the sale. Rather than some investors cashing out, it makes sense to sell the entire company, and since the investors have all the control, they can do that whether or not Tatarinov wants to do it. Face it, Elliott didn’t get involved because they want to build a better XenApp. They got involved to make money, and with Citrix’s value higher than it’s been in years, the time is now.

Who would buy Citrix? (2017 edition)

The first company on everyone’s mind is more than likely Microsoft, so let’s look at that first. It makes sense for a few reasons:

  • Microsoft has the resources to simply buy Citrix
  • Microsoft and Citrix have an ongoing technical relationship that goes back many years
  • Citrix has all but renamed its cloud product line “Citrix for Azure”
  • Without Citrix, Microsoft wouldn’t have much of a desktop virtualization angle in Azure
  • Citrix and Tatarinov would slide right into the organization

There’s also the matter of competition. If Microsoft didn’t acquire Citrix, that could mean that a competitor, AWS for example, could acquire them and steal revenue away from Microsoft. Microsoft could make the acquisition simply to avoid a scenario like that.

It used to be easy to make the claim that Microsoft didn’t need to buy Citrix because Citrix sold TS CALs for them. While that’s still true to some degree, that represents the old way of doing things. With Azure, the ONLY way Microsoft makes money from desktop virtualization is through third parties assembling platforms that use Azure. Currently there are several, but Citrix is by far the largest company that carries with it the most potential customers.

You could probably still throw Cisco and HPE into the ring, though those seem kind of obvious as “companies with money that play in adjacent spaces.” Could it work? Sure, but do either of them really want to spend money on a company that isn’t likely to help them out with their own growth problems?

Companies that are banking their future on hosting and managed services, like Fujitsu, IBM Global Services, or Accenture come to mind as potential candidates simply because the can acquire a platform and a customer base that can secure their offerings well into the future.

Potential buyers would also have to consider the integrity of the Microsoft/Citrix relationship when Citrix is under new management. Will that partnership fall apart if, say, AWS were to buy Citrix? If so, how much does that hurt the value? In fact, Microsoft might be able to scuttle the entire thing if they came out and said that they would no longer maintain a relationship Citrix post-acquisition.

The last potential outcome that I can think of is for Citrix to go private. Bloomberg estimates that it is a distinct possibility, though far from a sure thing. The number of $10 billion buyouts since 2008 is relatively few, and Citrix already came up empty during an attempt to go private back in 2015.

Still, what we’re seeing now is a leaner, meaner Citrix that might be better-positioned for going private. Private companies don’t have to deal with angry investors hell-bent on growth at all costs. They could still maintain the XenApp, XenDesktop, and XenMobile ecosystem and their profitability, but without the investors’ foot on their throat, making sure they protect that revenue stream above all else. A private Citrix might be the best possible outcome–still great at the old way of doing things, with plenty of resources dedicated to the future.

Wrap-up

I think Microsoft is going to have a lot of influence over how this goes down. Whether or not they acquire Citrix, invest in a privatization effort, adjust the depth of their relationship, or do nothing at all will weigh heavily on the outcome.

What I can say for sure is that this time around the rumors of Citrix being for sale seem to be more substantial, and it wouldn’t surprise me if we heard something sooner than later. Stay tuned for more information this all starts to take shape.

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