Technology company Citrix has been bought out and taken private by Private Equity firms Vista Equity Partners and Evergreen Coast Capital which is the private equity division of Elliott Management Corp. Citrix is a company that develops software that allows users to enable remote access to their computers, as well as other cloud services. This deal is valued at $16.5 billion and shareholders will be bought out at $104 per share. Shares are up over 20% since news of the potential acquisition began circulating. This is the first big deal over $10 billion of 2022 and it comes in the hard - hit technology sector which is one of the worst performing S&P sectors YTD. In Q4 of 2022, Citrix netted $.81 cents a share or $102.9 million. At a $16.5 billion evaluation, this equates to about a 25 times EBITA multiple and a little over 5 times annual revenue. This is right about average for a lot of technology companies as the most astonishing aspect of this deal is not the valuation but more the large size of the deal.
LBO’s (Leveraged Buyouts) have been on the decline since the credit crisis in ‘08. The massive amounts of debt taken on by the buy side firm can lead to net outflows of interest payments outpacing inflows from the acquired company, making it a net loss and thus leading to a restructuring of debt or bankruptcy. On any LBO, immense amounts of leverage is used - up to a 9-1 clip. Usually, 10%-20% of the deal is made through actual cash and the other 80%-90% is financed and made on borrowed money. Buy side firms actually use assets of the bought-out company as collateral for the money that is being used to buy them out. In other words, the private equity firm can borrow money on an asset that they have not purchased yet, and then use that borrowed money to acquire the company to be able to afford their interest payments. Incredibly ironic. Anyways due to obvious reasons following the 2008, large LBOs have been less and less popular but have made a resurgence since early 2020. Considering the macro environment, risk taking and use of large amounts of leverage is once again on the rise as evidenced by the over $950 billion dollars worth of private equity deals done in 2021 - which is more than double the previous peak in 2007. Low interest rates helped reduce the payments on debt that was put on by Private Equity firms, making it cheaper for them to borrow. As profitability of firms rose to historic levels, cash flows became larger and larger - which is a huge part of considering a buyout. As stated before, cash flow generation or EBITA, must be more than net outflows of the debt payments for the deal to be profitable and keep the company alive. Finally, a lot of these companies appeared to be “put on sale” when nothing had really impacted their business model during the pandemic. In fact a lot of companies came out stronger. A big driver for private equity firms to take a company private is when they believe the public market has not realized or anticipated the growth of the company. This is where PE firms step in to generate their own Alpha as they believe the public market has miscalculated their value. This was the case in Citrix, Vista Equity and Elliot Management believe that Ciritix will outperform in the private market and we shall see if their bet will pay off. LBOs have been increasingly popular and this $16.5 billion dollar deal will be the first of many in the Private Equity sector in 2022.
Sources:
https://www.wsj.com/articles/citrix-systems-to-go-private-in-16-5-billion-acquisition-11643635537
https://corporatefinanceinstitute.com/resources/knowledge/finance/leveraged-buyout-lbo/
https://www.bloomberg.com/news/articles/2022-01-30/citrix-said-to-near-sale-to-elliott-vista-at-104-per-share