Private equity firm Vista Equity Partners has finally found a suitable match for Tibco: it has teamed up with Evergreen Coast Capital (a unit of Elliot Management) to buy Citrix Systems for $16.5 billion.
The deal, which represents a roughly 30% premium on Citrix’s value, aims to combine the two companies to create a legacy enterprise tech powerhouse. But will the combination produce something more useful for customers, or a conglomeration that doesn’t really fit well together?
Citrix is best known for its desktop virtualization products, and it’d be fair to presume it did pretty well when the pandemic hit and companies had to shift employees to remote work. Having the ability to deliver work desktops in one package to at-home workers would seem to be a good feature to have these past couple of years.
But it’s not been tearing up the scoreboard with growth recently. Its status as a public company gives us visibility into its financial performance (including its mediocre earnings report released today), and as we’ll see, its lackluster growth likely makes it more of a takeover target.
Citrix’s new partner Tibco provides tools and infrastructure to manage and analyze data. But it launched in 1997, and the analytics market has evolved dramatically since then. There’s also way more competition and more data to manage thanks to the market-shift towards machine learning. Tibco has had to find a way to change with its market, having been born in the era of free AOL CDs.
Citrix was itself founded in 1989, long before the cloud changed the way companies deliver software, and many years before companies shifted to subscription-based revenue models. Both companies had to dramatically change their approach to the way they do business in recent years.
We don’t have much data on Tibco, but we do know that Vista was looking for a buyer for the company, which it bought for $4.3 billion in 2014.
It’s hard to know what became of that, but we do know now that Vista has decided to create a much larger enterprise company to deliver two seemingly different sets of services — virtualization and data analytics.
Can these two companies combine to make something better?
A look at Citrix’s financials
While we no longer have windows into Tibco’s financials, Citrix’s latest earnings results show a somewhat slow-growing company in the midst of a transition towards subscription-pricing and away from support incomes.
In the fourth quarter of fiscal 2021, Citrix generated revenue of $851 million, but that top line was up just 5% from a year earlier. The company’s profit fell slightly, though, to $112.1 million, but as the quarter included restructuring charges, and a huge tax benefit, it’s hard to compare the results directly.
As we can see, Citrix’s growth isn’t exactly stellar, and its rising operational costs are eating into its profitability. It’s not a total surprise to see private equity interested in its operations.
Inside the company’s modest growth is a key revenue mix-shift. Subscription revenues rose about 30% to $454.2 million from a year ago, while “product and license” and “support and services” revenues fell. If you want to focus on just the subscription business, there’s stronger growth to be found, but growth at the top line is hampered by intra-company revenue transfer.
Many companies have found themselves in similar situations, from Adobe to Microsoft. Shifting to subscription income from traditional sales takes time, and can lead to investors less than enthused at the modest growth. Again, private equity seems to fit into the picture, at least from a “Does this deal make sense?” perspective.
The price deserves a small note: Using its most recent results, annualized, Citrix has run-rate revenue of roughly $3.40 billion. The $16.5 billion cash deal’s full value is therefore worth around a revenue run-rate multiple of around 4.8x.
That doesn’t feel too expensive for a company growing in the single-digits. Indeed, you could argue that it’s actually cheap. But with the deal valued at a 30% premium, it’s hard to argue that Vista is getting away with theft.
The best prism to view the deal through is whether the combination can do more than merely adding one and one together to get two. If the companies manage it, the price could prove inexpensive in hindsight. If not, the deal could be more akin to the Hortonworks-Cloudera merger, which solved little for both companies.
Does this create something better?
There are a lot of questions here. If Vista was really shopping Tibco, perhaps it didn’t get its asking price and decided to go in another direction. Spending an additional $16.5 billion is a big shift in thinking over selling and presumably going all in with the Tibco investment.
What we have here, though, are two legacy companies selling very different services — each with its own approach to sales and marketing and revenue — that somehow have to be combined into something coherent.
Holger Mueller, an analyst at Constellation Research, says it’s about building a suite of products to give enterprise customers a one-stop shop for these kinds of services, and with both companies boasting big customer bases, they can cross-sell to each one, creating a larger possible addressable market. He adds that it could play out a couple of ways.
“The combo has a lot of assets to play with on the tech side, especially with Citrix’s virtualization and the future of work. But it will be all about execution, and we will see in a few months if Vista and Elliott are undertaking a go-forward and growth strategy, or if they will save costs and ‘milk’ the install base. The high price tag will make the latter strategy hard to lay off, but perhaps with some asset sales, it could work well,” Mueller said.
That said, he feels that this is a gamble by Vista: “Both companies are now on make-it-or-break path, [but at least they are] no longer lingering on the doldrums of slow innovation.”
That seems to be what this deal is about: taking a couple of companies that are long in the tooth and trying to make them into something more. Whether a larger entity would be in a better position to innovate is unclear, but Vista and Elliott obviously see something here worth combining.
If Wall Street investors are any benchmark, they are apparently not happy with the deal, with the stock down almost 4% at the time of publication.
Comment