Citrix Slide Brings Buyout Buzz

The software maker starts getting some attention.
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SAN FRANCISCO -- Days after hitting a 52-week low, it's no surprise that Citrix Systems (CTXS) - Get Report would start creating some buyout buzz.

On Tuesday, the stock climbed more than 7% amid rumors throughout the market that the company would be acquired, according to a research note by Avian Securities analyst Jeff Gaggin. (Shares gave back 21 cents on Wednesday to trade at $32.93.)

IBM

(IBM) - Get Report

and

Cisco

(CSCO) - Get Report

are "being talked about as the buyers," Gaggin wrote. "

I don't know if there is truth behind the rumors, but it does make sense," he added. Gaggin doesn't cover Citrix and Avian does not hold a position or make a market in its shares.

"If they are looking for a virtualization ... story, then Citrix is a good bet," Gaggin wrote. "We think Citrix has become a real threat to

VMware

(VMW) - Get Report

because Citrix has strong virtualization management features."

Fort Lauderdale, Fla.-based Citrix didn't respond to requests for comment.

Virtualization software provider VMware has developed the broadest range of management features to date and has the biggest market share, by far. Citrix, primarily an infrastructure, or middleware, supplier, bought XenSource in 2007 for its server and desktop virtualization software. XenSource had developed a hypervisor, the most basic piece of virtualization software, putting the company in a league with VMware and

Microsoft

(MSFT) - Get Report

, which is beta-testing its Hyper-V hypervisor in the Windows Server 2008.

IBM has offered virtualization on its hardware systems for many years.

Gaggin dismissed the idea that Citrix's biggest partner, Microsoft, would be interested in an acquisition, at least while the software giant is pursuing

Yahoo!

(YHOO)

. Moreover, "we think Microsoft is well on

its way to building a presence in virtualization."

A Citrix analyst, who has followed the company for a decade and asked not to be named, dismissed the idea that Citrix is in negotiations, largely because such rumors have encircled the company for years.

Regarding an acquisition by IBM, the analyst said "while you can't rule it out, it's not clear that they would want to do that. Citrix is irrevocably tied to Microsoft. IBM has an interest in supporting Linux

operating system and in not supporting Microsoft more than they have to."

The analyst compared the likelihood of calling a specific merger combination correctly to predicting where lightning will strike next.

But American Technology Research analyst Shaw Wu, who covers IBM, was less pessimistic about the idea, although he doesn't know if a deal is in the works. Stronger companies tend to make acquisitions in a "recessionary environment" when valuations of smaller stocks collapse, Wu said. Citrix has been mentioned as a target in the past, "but people have balked at the asking price."

Citrix is trading "well off its high of $44," Wu said. Such price compression could make it attractive to the giants.

But even at what seems like a bargain price, Citrix isn't cheap: With a market cap of $6 billion and expected revenue growth of 17% to $1.63 billion this year, the stock could command a fair premium, taking the potential buyout price north of $7 billion, assuming a premium of 15%.

To close the deal on middleware supplier

BEA Systems

Jan. 16,

Oracle

(ORCL) - Get Report

had to cough up a 42% premium over BEA's pre-bid price, which had been trading below full value while the company completed earnings restatements.

As with Citrix, BEA Systems was the target of perpetual buyout rumors before accepting Oracle's bid.

Wu doesn't see the acquisition of Citrix software supporting Microsoft as far-fetched. IBM is "of a size that makes sense for them to support all the platforms," Wu said. "The reality is that Windows is a big part of the world," he added.

Wu noted that hardware giant

Hewlett-Packard

(HPQ) - Get Report

is also perceived as a potential acquirer of infrastructure software companies.

IDC analyst Stephen Elliot sees a key reason Citrix would be open to a suitor: "Their lack of ability to make money off their core XenSource deal."

"VMware is everywhere, and Microsoft is getting their solution out. Citrix is getting squeezed from the low end

the Hyper-V and the high end

VMware," Elliot said.

Elliot sees some rationale for IBM and Cisco to go after Citrix. IBM could make the XenSource hypervisor its preferred brand and could better compete against VMware and Microsoft. This would run counter to H-P's strategy, which has professed to being indifferent on the hypervisor question, Elliot said.

On Citrix's side, IBM would lend "a lot more credibility" to the XenSource virtualization platform and provide development resources. "There are a lot of opportunities," Elliot said.

An acquisition by Cisco would be more interesting, because that company wants to build its data center resume, Elliot said. Although such a buyout would be "tough for Cisco to swallow," Citrix would bring the networking hardware company credibility on the software front. "This could position desktop services in virtualization as an extension to the data center .... It would be a revolutionary deal for them."

But Citrix isn't the most obvious means to Cisco's goal. Other software acquisitions could bring Cisco closer to the data center, Elliot said.