Goldman Sachs – Elliott Management is back in the picture at Citrix. What this means for profits
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Company: Citrix Systems, Inc. (CTXS)
Business: Citrix is an enterprise software company that provides workspace, app delivery and security, and professional services worldwide. The company offers workspace services and networking products for web, traditional and cloud-native applications. In addition, Citrix offers customer services, hardware maintenance, consulting, and product training and certification services.
Stock Market Value: $13.8B ($111.57 per share)
Activist: Elliott Associates
Percentage Ownership: ~10%
Average Cost: n/a
Activist Commentary: Elliott is a $40+ billion hedge fund with tremendous resources to analyze potential investments. They are a very successful and astute activist investor, particularly in the technology sector. Their team includes analysts from leading tech private equity firms, engineers, operating partners – former technology CEOs and COOs. When evaluating an investment, they also hire specialty and general management consultants, expert cost analysts and industry specialists. They often watch companies for many years before investing and have an extensive stable of impressive board candidates.
On Sept. 7, 2021, it was reported that Elliott Management has built a stake in CTXS of greater than $1 billion.
Behind the Scenes:
Elliott knows this company well as they previously filed a 13D here on June 11, 2015 and Elliott partner Jesse Cohn served on the Board from July 28, 2015 to June 3, 2020. This situation is not that dissimilar from Elliott’s 2015 engagement. Prior to Elliott’s 2015 campaign, the company had a series of execution issues, product release challenges, guidance issues and an undisciplined M&A strategy, resulting in margins decreasing from the high 20’s to the low 20’s. However, Elliott believed in the core business and thought it was underappreciated by the market. In Elliott’s 2015 13D filing, they outlined a strategic and operating plan for the company to address these issues and shortly thereafter, the company appointed Jesse Cohn to the board, where he was also a part of the operating committee and the transaction committee. During those five years, the company was transformed – margins increased from 22% to a peak of 31% in 2018, several underperforming non-core assets were shut down, the company’s GoTo assets were spun-off and merged with LogMeIn, Inc., the company bought back approximately $4 billion of stock, a dividend was initiated, revenue growth began to accelerate and the company began a subscription transition. Elliott exited its 13D in November 2019 with a 102.5% return versus 49.5% for the S&P500, and Jesse Cohn stepped down from the board in the spring of 2020.
However, since then the company seems to have lost its way with a lot of the progress Elliott had made being reversed. Margins are back down to 22.6%, and the company recently made its most expensive acquisition ever – buying Wrike for $2.25 billion. Further, there have been execution and guidance issues again: The company missed in the first quarter and guided down. Despite the lower guidance, it missed in the second quarter and guided down again, sending the stock in a freefall down to a low of $94.66 on July 29, 2021 from a high of $146.94 as recent as Oct. 12, 2020. This is all concerning and likely why Elliott has decided to become a shareholder again.
There are two ways to create value here. Elliott can re-implement its 2015 game plan, get a director on the board, hold management accountable and improve margins and institute better strategic discipline. Alternatively, there is a strategic path to sell the company. In 2017, it was reported that Bain, Carlyle and Thoma Bravo each submit bids to buy the company. In 2019, it was reported that the company hired Goldman Sachs to explore a potential sale. The company’s stock was at a similar level then as it is now and the company is a much more attractive acquisition target today for several reasons. First, as a result of the global pandemic, the company has become a much more strategic asset in a remote working or hybrid environment. Second, its fundamentals are better today, and revenue is higher. Finally, there is a lot of dry powder for private equity companies today looking to do big deals. While most likely too large for Elliott’s private equity arm, Evergreen Coast Capital, at least on its own, there is no reason why they cannot team up with other private equity companies to acquire the company. There is nothing more powerful for an activist than to be able to say to a company: either fix your issues or we will come in and acquire the company and fix them ourselves.
One meaningful distinction between this campaign and 2015 is that this time around, Elliott has not filed a 13D despite having a 10% position. Based on their history and philosophy, that is likely because Elliott is using swaps and other derivatives to build their position and those types of securities are not required to be included in “beneficial ownership” for the purposes of 13D filings. The potential downside to this is that if it comes to a proxy fight, Elliott will have to convert its derivatives to common and become a 13D filer if it wants to have the voting rights that go along with its economic ownership.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.