Yesterday, Elliott Management, a 7.1% owner in Citrix Systems, advised Citrix in writing that drastic changes are needed in order to refocus the company and return it to profit. Elliott not only voiced concerns about the current modus operandi, but it aggressively proposed ways that it could return Citrix to a positive trajectory by making adjustments related to business management, products, and finances. Although the letter starts off asking for a meeting with the Board of Directors, it later states that “the far better course is for Citrix to embrace this offer of cooperation and for us to proceed collaboratively, and quickly.” Is this a hostile takeover threat? There are a number of questions surrounding whether this indeed will result in a takeover, an infusion of investment dollars and professional guidance, something in between, or nothing at all. It is my hope that the result of this letter will be some professional guidance.
This isn’t the first tech company that has received such a letter from Elliott Management. Riverbed, Juniper, and others have similarly been targeted by Elliott. Riverbed, for example, resolved as a standstill agreement after months of negotiations. Investors are focused on driving profitability, but are the proposed changes good for Citrix customers and employees? Or could these changes instead have a negative impact and cause Citrix and its technologies to implode? Could Elliott be planning to dismember the company and sell it off piece by piece?
First, Elliott fully acknowledges that “Citrix has great products in strong markets.” That is indeed true. For example, features such as HDX consistently hold Citrix XenApp/XenDesktop in the #1 spot. Elliott stated that Citrix is missing the opportunity to capitalize on those products and that a number of changes are necessary in order to streamline the business. The “New Citrix Plan” for reformation was developed by Elliott, reportedly with input from various consultants. Having been both a Citrix employee and an external technologist, I can say that it’s always easiest to criticize from the outside looking in.
There is certainly some merit to several of the statements made within the letter. For example, Elliott recommends selling off the GoTo business. Acquired products such as GoTo and Podio lack specific alignment with the core business, and there are few who would disagree with divestiture.
Similarly, Elliott recommends spinning off the NetScaler product line. A few years ago, that may have been sensible, but today, NetScaler is intertwined with the core business as related to Gateway functionality. Although competitors such as F5 have claimed success with front-ending XenApp and XenDesktop with clients such as Facebook, the vast majority of Citrix customers choose NetScaler Gateway due to the tight coupling of the application and desktop virtualization product. If NetScaler were to be decoupled from Citrix XenApp/XenDesktop and a Citrix Secure Gateway-like product were to be released to address the Gateway requirements, customers around the globe would cheer, and only then would the NetScaler spinoff be logical.
On the business side, Elliott stressed that some management changes would be necessary and cited analytics related to sales overhead being out of proportion. If layers of management are truly removed in order to flatten the organization, this makes sense; however, in the past, layoffs at Citrix have often disproportionally affected individual contributors. Client-facing individuals and technical people are the lifeblood of Citrix, and if Elliott does succeed with its proposal and targets cuts in either of these two areas, the results cannot be positive.
Citrix’s success boils down to its technology and its people. Even if the Elliott letter does not materialize into any action, it will, at a minimum, stifle the entire company for a few weeks. People will get scared and leave, and projects will be stalled. Whether the result is an ugly hostile takeover, no changes, or something in between, for the sake of the products, customers, and employees, no one will win if a prolonged battle occurs.
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