Citrix Falling Short May Spur Activist, Breakup Talk: Real M&ABrooke Sutherland
Citrix Systems Inc. could be the next technology company to attract an activist investor angling for a breakup.
The $10.7 billion maker of software that lets employees access their workspace remotely posted first-quarter earnings that fell short of analysts’ estimates and lowered its guidance for the rest of the year. Higher costs and slower revenue growth have left Citrix with lower margins and a cheaper valuation than many of its U.S. peers, according to data compiled by Bloomberg.
That may draw the attention of an activist investor who could push for divestitures or a breakup to boost the shares, said Derrick Wood, a San Francisco-based analyst at Susquehanna International Group. Citrix’s software-as-a-service operations, which include online meeting organizer GoToMeeting, isn’t as closely tied to the core data center and desktop businesses and might be a candidate, he said.
“Citrix fits the bill both in terms of valuation as well as some of the execution issues,” Wood said in a phone interview. “There are arguably some synergies between some of its divisions but they are reported separately and that does give rise perhaps to interest from activist shareholders to try and break up some of these divisions.”
Daniel Ives of FBR & Co. says Fort Lauderdale, Florida-based Citrix should part with NetScaler, which helps speed up the delivery of Web- and mobile-based applications. That business is more mature and its results tend to be uneven, Ives said.
Either way, investors are expecting something bolder than the cost cuts and share repurchases it’s already doing, said Rick Sherlund, a New York-based analyst at Nomura Holdings Inc. After Citrix lowered its guidance on April 22, the stock actually rose 4 percent as investors bet the latest disappointment might force the company to take more action.
“It comes down to whether shareholders create enough pressure to force more change or whether investors will be content to watch and wait another year,” Sherlund said in a phone interview. One goal of pushing Citrix to slim down could be to make the company more digestible for a private-equity buyer, he said.
Citrix’s enterprise value is 3.5 times its sales in the past 12 months. That compares with 5.6 times for remote-access provider LogMeIn Inc. and 4.2 times for F5 Networks Inc., which is similar to Citrix’s NetScaler business. Both of those have higher gross margins as well, even though they generate a fraction of the revenue that Citrix does, said Kevin Buttigieg, an analyst at Stamford, Connecticut-based MKM Partners.
“That’s where the disparity lies,” Buttigieg said in a phone interview. “You could make the case that if you spun off at least some businesses that they could receive a higher valuation than what Citrix is currently trading for and you would be left with perhaps more of a simplified structure that would allow greater margins to be realized.”
Eric Armstrong, a spokesman for Citrix, didn’t respond to a phone and e-mail request for comment.
Selling or spinning off that division would be the cleanest way to break up the company, said Brad Reback, an Atlanta-based analyst at Stifel Financial Corp. There would be plenty of interested buyers for it, from Microsoft Corp. to Cisco Systems Inc., he said.
The challenge is that Citrix has risen 18 percent from its January low and that reduces the potential upside for an activist buying shares now, said Sherlund of Nomura. Even so, investors could become more vocal if they’re not happy with the pace of change, he said.
Underperforming technology providers have been some of activists’ favorite targets. Companies from Teradata Corp. to EBay Inc. are among those that have been pushed to consider sales or breakups.
“The seeds are there for M&A,” Ives, a New York-based analyst at FBR, said in a phone interview. “If you’re not a fast grower in a great space and, much like Citrix, you’re plodding along and miss or have an OK quarter, all of sudden those guys start to get a target on their back.”