Of Mice And Microsoft

How Citrix' overnight success turned so sour so fast

Dancing with an elephant is tricky in the best of circumstances. Dancing with an elephant that changes course on a dime can be downright hazardous. Just ask Edward E. Iacobucci, chairman of Citrix Systems Inc. in Fort Lauderdale, Fla. The software company saw revenues triple to $45 million last year from just $15 million in 1995. At its peak last year, the company had a market cap of nearly $1.5 billion. Most of that amazing performance was based on a relationship with Microsoft Corp. that came down to this: Microsoft endorsed Citrix technology that lets a dozen or more computers share Windows programs running on a central, networked computer. With the software giant's blessing, Citrix was golden.

The merry dance ended on Feb. 26, when Citrix announced that Microsoft was considering adding features to new versions of Windows to do part of what Citrix' products do. With Citrix' Microsoft relationship in question, investors fled and the stock plummeted 60% on Feb. 27, to 10 5/8 from 26 1/4. On rumors of a Microsoft rift, it already had fallen nearly $6 a share earlier that week. Citrix' market capitalization briefly dropped below $250 million.

FRIEND OF BILL. What's surprising is that the market was so surprised. After all, the reliance on Microsoft was listed prominently among "risk factors" in public disclosures made in connection with Citrix stock. The documents even alerted investors to the possibility of Microsoft becoming a major competitor. "They were clear, to my knowledge, that Microsoft might end up with a similar technology," says James E. Allchin, a Microsoft senior vice-president.

Part of what may have lulled Citrix investors into a sense of security was Iacobucci's history with Microsoft Chairman William H. Gates III. Iacobucci says he worked with Microsoft "when Microsoft was smaller than Citrix." Before starting Citrix in 1989, Iacobucci worked for 11 years at IBM and headed the IBM-Microsoft team that developed the OS/2 operating system. Gates even wrote the foreword to Iacobucci's OS/2 Programmer's Guide. Microsoft was an early investor in Citrix, owned 6.8% of its shares, and had a board seat.

All that meant little when it came down to business: Citrix was serving a market that Microsoft figured it needed to be in. Citrix products allowed customers to hook up all sorts of computers--including Macintoshes and stripped-down "network computers"--to servers that let them use Windows or Windows NT programs.

Microsoft says it began exploring the development of such "multi-user capability" because customers were asking for it. Microsoft blessed the Citrix approach so customers could get immediate gratification. But, says Allchin, it "was just a question of time" before Microsoft would develop its own product. Coming now, the timing is sooner than the market had anticipated, says Thomas C. Offut, vice-president of business development for Wyse Technology Inc., a network-computer maker and strategic partner with Citrix.

Citrix still has a business, with Microsoft's own version months or perhaps years away, says Chip Gliedman, director of research for technology consultants Giga Information Group Inc. "Every company that has made its living extending Microsoft's capability has had to learn to dance between the feet of the elephant," he says. "I'm not writing Citrix off, and I'm advising our clients who are deploying Citrix not to do so."

UNDEAD. Indeed, addressing industry analysts at a Robertson, Stephens & Co. technology conference the day after the announcement, Iacobucci borrowed a line from Mark Twain, assuring investors: "The reports of my death have been greatly exaggerated." Citrix, he points out, has licensing agreements with Microsoft and other strategic partners, $137 million in cash, and no debt.

And while Microsoft plans to build more components into Windows that make multi-user and remote-user capability possible, both Iacobucci and Allchin point out that the software giant may license some technology from Citrix in its multiuser programming. "Microsoft is a big enough company that it can do anything it wants when it wants to," Iacobucci says. "The fact that we're still here [negotiating] bodes well." Indeed, that's what happens when you dance with elephants. You get crushed--or learn to dance faster.

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