The X Factor: Everybody Wants Citrix Systems?

Published: April 22, 2008

by Timothy Prickett Morgan

With the economy bumping along, sometimes up and sometimes down, depending on the metrics you want to use, and big IT suppliers looking for rich, new markets to mine, every time someone gets bored and the news gets a little slow, out comes another merger and acquisition rumor. In recent weeks, the chatter out on there on the Internet and at the water coolers of IT suppliers looking for a deal and Wall Street banks looking for some good news (and visa versa) is that Citrix Systems, which itself just last year spent a fortune to acquire server and desktop hypervisor expert XenSource, is possibly in play.

The Citrix acquisition rumor seems to have gone public in a research note put out by Jeff Gaggin, enterprise software analyst at Avian Securities, which has been subsequently and duly reported by Barron's, Computer Reseller News, TheStreet.com, NetworkWorld, and now IT Jungle. The rumor seems to have started because shares in Citrix rose by more than $2 on Monday, April 7, and people started asking why given that the company had just hit a 52-week low in its share price.

The tongues have been wagging ever since, and the note put out by Gaggin suggested that IBM and Cisco Systems, which both have substantial stakes in server virtualization (and Cisco, with network virtualization), being the most likely candidates to do a deal. The supposed chatter also names Hewlett-Packard and Microsoft as potential Citrix suitors.

Whether or not there really are companies talking to Citrix to do an acquisition or a merger, the fact is that this is probably as good a time to acquire the $1.5 billion provider of application streaming and computer virtualization software as will happen in the near term, with a market capitalization of $5.8 billion. Citrix hit a peak pushing close to $45 a share in early 2006 and fell to levels it is at now (around $32 buck a pop), and then grew to almost the same $45 level again in the wake of its $500 million acquisition of XenSource, the commercial entity behind the open source Xen hypervisor that had only $1 million in sales in 2007 and that is one of the few credible challengers to server and desktop virtualization that IT industry darling VMware.

VMware went public last year and quickly rocketed up to a $45.2 billion market capitalization, which just goes to show how stupid Wall Street can be--unless you count the guys who pumped the stock and sold at the top. The company, which had $1.3 billion in sales, is the market leader in X64 server and workstation virtualization, but Microsoft is still asleep--until Hyper-V comes out. Remember: the vast majority of server virtualization that is going on out there in X64 Land is happening on Windows. So once Microsoft has its Hyper-V act together, VMware will have competition for the first time with the deepest pockets in IT: the back right pockets of Bill Gates, Steve Ballmer, and Paul Allen.

There is a certain symmetry to an IBM acquisition of Citrix, since it was founded 19 years ago by some former IBM employees. IBM has only $12 billion in cash right now, but generates many billions each quarter. Say Citrix could be acquired for a 20 percent premium over its current market cap--if Citrix is worried about competition from Microsoft and VMware--and say that IBM wanted to get control of a 200,000-plus strong customer base (many of whom use other brands of servers and mostly Windows), then it might even pay a 50 percent premium to do the deal. That is about $9 billion, and it would be the most expensive acquisition by far that Big Blue ever did. IBM just spent $4.9 billion to buy business intelligence software maker Cognos, which is its largest acquisition in history, and by a big margin. So maybe the company is more willing to do big deals. That is a lot of dough to pay for around $400 million in sales and maybe $65 million in profits each quarter. It will take nearly six years to pay off that acquisition in terms of revenue back to the company; EMC recouped its $635 million VMware investment (in terms of aggregate revenues from VMware, not profits) in a few years.

As for Cisco, the company's stock is also down, but it is so much at the heart of the Internet buildout that it is hard to imagine this will be true for long. Cisco has $5.2 billion in cash and $17.5 billion in short-term investments it could liquidate, and if it wanted to get a jump on infrastructure software and pretty much mothball the V-Frame server and network virtualization software it acquired or mix it with the Xen and Citrix products, the company can and maybe should buy Citrix. But that doesn't mean Cisco is thinking about it.

Similarly, Microsoft can afford Citrix, and probably should have bought it a long time ago. (The irony of Microsoft taking over Xen, and probably nullifying it, is almost worth Bill Gates writing that check.) Microsoft should probably be more worried about Citrix than it is Google, but Microsoft has never been able to stand anyone else making any money that it believes it has a right to. (There is no business too good or too big that Microsoft can't buy its way into, much as Oracle does, too.) Then again, Microsoft's pockets are not as deep as they used to be, with $7.5 billion in cash and $13.6 billion in short term investments. It's not like Microsoft isn't going to have to borrow money for its $42.8 billion deal to acquire Yahoo. Nobody, of course, talks about that.

Finally, HP could make a nice little business out of Citrix, but the $9 billion or more that the company could command on Wall Street might be a little too rich for HP's blood. HP has $9.9 billion in cash and no investments to speak of, and it has been burning cash to make deals for the past couple of years. Basically, a Citrix deal would leave it with nothing in the bank but the future. This seems very, very unlikely. Maybe Citrix would just do an old-fashioned stock swap and basically just opt for employment at HP? Seems unlikely, doesn't it?

Sometimes, the valuation that Wall Street gives a company limits its merger options rather than enhancing them, and then they have to go it alone.

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