Today, Elliott Management Corporation (“Elliott”) holder of 7.1% of
Citrix Systems (NASDAQ:CTXS) stock, sent the following letter to the
Board of Directors of Citrix:
June 11, 2015
The Board of Directors
Citrix Systems, Inc.
851 West Cypress
Creek Road
Fort Lauderdale, FL 33309
Attn: Thomas Bogan,
Chairman
Attn: Mark Templeton, CEO
Dear Thomas, Mark and Members of the Board:
I am writing to you on behalf of Elliott Associates, L.P. and Elliott
International, L.P. (together, “Elliott” or
“we”), which together own 7.1% of the
common stock and equivalents of Citrix Systems, Inc. (NASDAQ: CTXS) (the
“Company” or, “Citrix”),
making us one of your largest stockholders.
We believe that Citrix can achieve a stock
price of $90 – $100+ per share by the end of 2016. This
outcome – which represents an increase in stockholder value of
approximately 50% – is achievable because Citrix has leading technology
franchises in attractive markets but has struggled operationally for
years. As a result, today Citrix’s operations and product portfolio
represent an opportunity for improvement of uniquely significant
magnitude.
The purpose of today’s letter is to a) introduce ourselves, b) preview
some of the extensive work we have done to validate the $90 – $100+ per
share opportunity, and c) respectfully request a meeting with the
Company’s board of directors (the “Board”)
to share our detailed thoughts about how to improve Citrix for the
benefit of stockholders, employees and customers.
Today’s letter is being made public primarily because Elliott has become
a 13D filer. We want to be clear about our intentions and avoid undue
speculation.
To be clear, we approach this opportunity with tremendous respect for
the work Mark and the entire Citrix team have done to achieve
technological leadership, particularly in the high-quality markets in
which Citrix participates. Without their vision, the enormous
opportunity outlined below would not exist today.
About Elliott
Elliott is an investment firm founded in 1977 that today manages more
than $26 billion of capital for both institutional and individual
investors. We are a multi-strategy firm active in debt, equities,
commodities, currencies and various other asset classes across a range
of industries. Investing in the technology sector is one of our most
active efforts at Elliott and one in which we have built a long track
record.
Within the technology sector, we have made approximately three dozen
active investments and have successfully identified value-creating
opportunities at companies such as BMC, Informatica, Brocade, Riverbed,
Juniper, Novell/Attachmate, Blue Coat and many others.
One key differentiating factor in Elliott’s active investments,
especially in the technology sector, is our deep focus on operations.
Our team includes experienced and proven C-level executives with
technical and operational capabilities from software and technology
companies. These executives evaluate operations, products and markets
within our investments and work to develop strategies to streamline
operations, grow revenue and create value. We also have long-lasting
engagements with leading operations consulting firms, sales and
marketing specialists, and technical consulting firms that we deploy on
our investments. Finally, in addition to our public portfolio, we have
significant investments in private technology companies, which provide
important insights into operating best practices, market trends and
general industry knowledge.
The Citrix Opportunity
Citrix has great products in strong markets. However, Citrix has
struggled operationally and has consequently missed a profound
value creation opportunity to capitalize on these products and markets.
Despite Citrix’s strong products, the Company’s stock price performance
tells the story of deep underperformance across every relevant
benchmark, including its closest peers, over every time period during
the last six years:
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Ending June 10, 2015
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Citrix's TSR Relative to:
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1 Year
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2 Years
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3 Years
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4 Years
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5 Years
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6 Years
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1. S&P 500 Index
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(7%)
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(29%)
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(84%)
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(98%)
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(65%)
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(56%)
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2. NASDAQ Composite
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(16%)
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(46%)
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(100%)
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(120%)
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(93%)
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(96%)
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3. S&P 500 IT Index
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(13%)
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(42%)
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(80%)
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(111%)
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(71%)
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(70%)
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4. Proxy Peer Group
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(15%)
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(44%)
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(85%)
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(116%)
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(56%)
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(74%)
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Over the years, Citrix has recognized that operational changes are
needed and that its product portfolio requires rationalization. In 2010,
Citrix made promises of “efficiency” and “focus” with the goal of
achieving margin targets and rationalizing the portfolio. Unfortunately,
these promises were followed by a period of nearly 400 basis points of
margin contraction and an expansion into several non-core product
categories.
In early 2014, Citrix again made a series of promises to address the
operational and share price underperformance. Despite the fact that
these promises were nearly identical to the promises made in 2010, many
investors and analysts hoped that this time Citrix was finally going to
remedy the serious deficiencies in its cost structure. However,
operating expenses have continued to outpace revenue growth, and both
profit margins and profit dollars have declined over the last 12 months.
It is perhaps because Citrix’s promises have uniformly been followed by
increased costs and greater product breadth that the research community
maintains a skeptical approach to Citrix and continues to call for
organizational change, as the quotes below illustrate:
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“We maintain our Buy rating, although we stress that significant
changes are needed to help drive value for shareholders, which
would include rationalizing business lines as well as further cost
reductions” – Goldman Sachs, April 2015
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“We have found that it takes the same time, if not longer, to explain
the businesses that Citrix is in as to explain Microsoft. We
believe divestitures would help clarify the business for investors,
which would help the stock price” – Sanford Bernstein, April
2015
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“The Company’s execution has been terribly poor for more than 2
years, and we believe management will be compelled to make more
organizational changes going forward – beyond those already announced”
– Credit Suisse, April 2015
This is just a small sampling of commentary, but it provides a highly
accurate picture of analyst sentiment toward Citrix and is consistent
with other well-respected software analysts. Furthermore, based on
numerous conversations with your stockholder base, we believe these
quotes are representative of stockholder sentiment as well. Unfulfilled
announcements of expense rebalancing and incremental, recurring
restructurings are damaging to companies and destabilizing to their
employees and customer relationships. In Citrix’s case, these
announcements have also impaired the Company’s credibility with
stockholders. We believe that Citrix today has a far superior
opportunity to make serious and lasting changes and to create
sustainable value for stockholders.
New Citrix Operating Plan
Today, Elliott is formally requesting a meeting with the Board to share
the details of an operational plan that we believe will create
tremendous value for stockholders. What we call the “New Citrix”
Operating Plan (the “New Citrix Plan”) was
developed through exhaustive research and with the help of a full team
of operating partners with proven experience turning around software
companies. That team includes the following:
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Senior Software Executives: We have assembled a team of senior
software executives to evaluate Citrix and the opportunity for value
creation. These are C-level software executives who have assisted us
in understanding the operating and strategic possibilities at Citrix
and who have helped diagnose issues at, and develop solutions for,
other software and technology companies in which we have invested.
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Top-Tier Consulting Firm: We retained a leading consulting firm
to aid in our in-depth diligence on Citrix’s products and markets,
conducting a survey of more than 400 customers and channel partners,
enabling us to better understand the competitive landscape from a
customer’s perspective and identify key factors in purchase decisions.
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Sales and Marketing Specialist Firm: We engaged with a leading
salesforce consulting firm to analyze Citrix’s go-to-market strategy
and its efficiency. We evaluated Citrix’s salesforce organization
structure, typical deal team composition, channel ecosystem and
compensation methodology to determine what steps are needed to conform
Citrix’s go-to-market strategy to the industry’s best practices.
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Operations Consultant: We worked with a major operations
consulting firm to conduct a “deep-dive” on Citrix’s operations in
product development, professional services and various support and
corporate functions, which provided important insight into Citrix’s
geographic footprint, utilization of its international workforce and
efficiency of its product development organization.
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IT Specialists and Data Center Engineers: We worked with highly
experienced technical experts with deep knowledge of Citrix’s product
portfolio to better understand how it evolved, including understanding
perspectives on product roadmaps, critical features / functionality
and how these products integrate into broader IT solutions.
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Investment Banking Firms: We engaged with two leading
investment banks to ensure our understanding of capital return
options, as well as strategic options for the GoTo and NetScaler
divisions.
The New Citrix Plan is based upon two driving principles: the need for
i) fundamental change and ii) effective
oversight. The key components for fundamental change are as
follows:
1) Implementation of Operational Best Practices: Citrix’s cost
structure is the result of years of layered complexity and expenses. The
structure has become highly inefficient in terms of actual cost and is
also ineffective at generating revenue growth. We have identified
numerous opportunities throughout the organization for significant
improvement, which we believe will result in both superior revenue
performance and a more efficient use of resources. In total, our New
Citrix operating model target for operating expense is a range of 54.5%
– 55.0% of revenue by 2017 relative to 63% over the last 12
months. Our team has identified the major areas for improvement as
follows:
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Sales & Marketing: Citrix’s sales & marketing organization
is operating well below industry benchmarks on efficiency and
effectiveness, with the weakest metrics among its peers. This is
primarily the result of a highly cumbersome and ineffective
go-to-market strategy. Critical operational metrics, including the
ratios of management positions to quota-carrying reps and sales
engineers to field reps, remain out of line with industry best
practices. This inefficiency has led to weak productivity per sales
FTE and is exacerbated by poor alignment between performance and
compensation. In addition, Citrix’s channel strategy is stretched
across too many channel partners, with important channel-enablement
resources being directed to sub-scale partners. We are confident all
of these issues are fixable through a full realignment to implement
best practices in the areas of deal team composition, sales management
span of control, channel management and compensation structure.
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Research & Development: Citrix’s product development effort
needs a full operational review with strong cross-functional
participation. The recent product-release issues in both XenApp and
XenDesktop, marred by critical feature gaps from prior versions, had a
deep impact on execution over the last several years and demonstrated
a disconnect between customer requirements and development roadmaps.
In addition, Citrix’s recent history of funding speculative R&D
initiatives without clear route-to-market or tangible competitive
advantage must be reevaluated immediately. These speculative or
non-core projects need to be scaled back or eliminated and resources
reallocated to the product categories where Citrix has the greatest
likelihood of success. Return-on-investment project tracking with a
focus on risk-adjusted returns needs to be implemented and strictly
followed.
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Product Portfolio: Citrix’s product portfolio is too broad for
its scale and contains far too many underperforming product lines that
consume valuable resources, have low or negative (i.e., loss-making)
return profiles, and serve as distractions. For example, we believe
CloudBridge, CloudPlatform and ByteMobile are non-core, are
underperforming and are distractions to the management team. We
believe these businesses, particularly ByteMobile, should be sold or
realigned.
2) Evaluation of High-Value Non-Core Assets: Citrix possesses
high-value, strategic assets that we believe can be separated from the
core Workspace Services segment: the GoTo franchise and NetScaler. Such
separations would not only be meaningfully accretive to value but also
would enable Citrix management to focus on improving the Company’s core
operational execution.
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Spin or Sale of the GoTo Franchise: While we recognize the
broad notion of empowering a mobile workforce, this business’s
go-to-market strategy, product development roadmap and end-market are
absolutely distinct from the core of
Citrix. GoTo is an attractive business with scale in its market, and
we have confidence that it can realize significant value through
several alternative transaction structures, including a sale or a
spin. We also further believe that core Citrix’s management can create
significantly more value for stockholders by focusing on operational
execution rather than attempting to oversee the GoTo franchise.
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Exploration of Strategic Alternatives for NetScaler: We are not
explicitly advocating for a sale of NetScaler, but we believe the sale
option should be seriously explored to assess potential strategic
buyer interest and valuation, which we believe may be robust.
NetScaler is an excellent business, and its ADC technology is an
industry-leader; however, we believe Citrix has overly relied on the
virtualization cross-sell, resulting in significant under-penetration
in non-virtualization use-cases and within the telco vertical. We
believe other strategic owners can accelerate NetScaler’s growth
through greater scale and unique customer relationships. It is
critical for the Board to consider whether Citrix is the parent
company best positioned to maximize NetScaler’s
value.
3) Capital Allocation: If effectively executed, the New Citrix
Plan will result in tremendous value creation over the next several
years. As a result, Citrix’s stock is deeply undervalued today.
Furthermore, Citrix’s balance sheet is being under-utilized given its
strong cash flow profile, even at today’s level of inefficiency. At a
more appropriate 1.5x – 2.0x target net leverage ratio, Citrix would
have $4.5 – $5.3 billion of buyback capacity through 2017 while
maintaining an investment grade rating. Debt financing remains at
historically attractive levels, and we believe Citrix should take
advantage of this opportunity to repurchase 56 – 61 million shares from
now through 2017.
4) Management: Over the past two years, Citrix has suffered a
wave of senior-level management departures, which have introduced
uncertainty and instability into the organization. In several cases
(e.g., Sumit Dhawan and Bob Schultz), these valuable managers have left
to join Citrix’s direct competitors. Citrix requires stable and
confident leadership of its business units and, under the New Citrix
Plan, will also require proven operational skillsets to drive
fundamental change. Elliott is looking forward to working with Citrix to
address its ability to retain and recruit top talent.
This high-level summary is a brief overview of the details supporting
the New Citrix Plan. Though significant in magnitude, changes of this
kind are relatively common in the software sector. Nonetheless, a key
differentiator, and the second tenet of the New Citrix Plan, is effective
oversight. A
strong and capable Board that oversees and holds management accountable
is critical. We look forward to discussing our
recommendations regarding proper oversight of the New Citrix Plan’s
execution.
New Citrix Plan Results
By implementing the New Citrix Plan and providing the oversight
necessary to ensure its execution, we believe Citrix can achieve a stock
price of $90 – $100+ per share by the end of 2016, excluding
the impact of separating NetScaler and GoTo. We believe there is
potentially significant upside from these
price targets if Citrix executes on the separation of these high-value
strategic assets. The table below details Elliott’s model scenarios
supporting our stock price targets.
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Elliott Base Case
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Elliott Upside Case
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‘14A – ‘17E Revenue CAGR 1
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4.0%
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5.5%
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2017E Operating Expense % of Revenue
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55.0%
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54.5%
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2017E Operating Margin
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30.0%
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30.5%
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2017E Leverage (Net Debt / EBITDA) 2
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1.5x
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2.0x
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2017E EPS 3
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$6.20
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$6.70
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NTM P/E Multiple 4
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14.5x
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15.5x
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2016 Price Target 5
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$90.00
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$103.75
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% Gain to Unaffected Price 6
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41%
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63%
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As this table demonstrates, reasonable revenue growth and P/E multiple
assumptions can achieve tremendous results under the New Citrix Plan.
Moreover, the vast majority of the value creation of approximately $26
in the Base Case is driven by operational improvements, as margin
expansion drives approximately $207 per share of value
increase and improved capital allocation drives approximately $6 per
share of value increase.
Next Steps
As is always the case, we look forward to a collaborative and positive
dialogue with Citrix’s Board and management. To that end, we
respectfully request a meeting in the next few weeks with the full Board
during which we can share a detailed presentation of the New Citrix Plan
and discuss what we believe are the necessary steps for its
implementation. It is our sincere hope that we can work together to
implement the New Citrix Plan, which we are confident will create real
and lasting value for your stockholders.
Elliott hopes that the Board also sees the need for fundamental change
and oversight and will therefore be excited to embrace this opportunity.
We would be remiss if we failed to note that, to date and as recently as
last month, the Company has repeatedly resisted public calls for real
change from the broader investment community. We hope that the Company
can move on from that position and work together with us to realize the
profound opportunity to create value that is undeniably before us.
Elliott is prepared to push for change directly, but the far better
course is for Citrix to embrace this offer of cooperation and for us to
proceed collaboratively, and quickly, together.
Thank you very much for your time and consideration. I look forward to
our meeting.
Best regards,
Jesse Cohn
Senior Portfolio Manager
Cautionary Statement Regarding Forward-Looking Statements
The information herein contains “forward-looking statements.” Specific
forward-looking statements can be identified by the fact that they do
not relate strictly to historical or current facts and include, without
limitation, words such as “may,” “will,” “expects,” “believes,”
“anticipates,” “plans,” “estimates,” “projects,” “targets,” “forecasts,”
“seeks,” “could,” “should” or the negative of such terms or other
variations on such terms or comparable terminology. Similarly,
statements that describe our objectives, plans or goals are
forward-looking. Our forward-looking statements are based on our current
intent, belief, expectations, estimates and projections regarding the
Company and projections regarding the industry in which it operates.
These statements are not guarantees of future performance and involve
risks, uncertainties, assumptions and other factors that are difficult
to predict and that could cause actual results to differ materially.
Accordingly, you should not rely upon forward-looking statements as a
prediction of actual results and actual results may vary materially from
what is expressed in or indicated by the forward-looking statements.
About Elliott Management Corporation
Elliott Management Corporation manages two multi-strategy hedge funds
which combined have more than $26 billion of assets under management.
Its flagship fund, Elliott Associates, L.P., was founded in 1977, making
it one of the oldest hedge funds under continuous management. The
Elliott funds' investors include pension plans, sovereign wealth funds,
endowments, foundations, funds-of-funds, high net worth individuals and
families, and employees of the firm.
1 Elliott estimates, based on Company filings and Wall Street
estimates. Analysis performed as of June 10, 2015
2 Share repurchase plan assumes a mix of accelerated share
repurchases and recurring quarterly buybacks between 2015 and 2017 to
target the stated net leverage levels. Share repurchases are assumed to
be funded by available US cash ($250 million minimum US cash balance)
and the issuance of US debt financing at a 4.5% annual rate. Incremental
interest expense from new debt issuance netted against US taxable income
at the US statutory rate of 35%. Share repurchases executed at a price
per share implied by similar valuation multiples as the assumptions
above. The Elliott Base Case and Elliott Upside Case assume an average
share repurchase price per share of $80.25 and $87.75, respectively, for
the 2015-2017 repurchase plan (round to the nearest $0.25 per share)
3 EPS metrics round to the nearest $0.05
4 Elliott estimates, based on a conservative valuation
relative to the Company’s peer group
5 Price targets round to the nearest $0.25. The impact of the
convertible note conversion at $90 per share assumed to be mitigated by
the existing note hedge
6 Unaffected price assumed to be $63.80 as of April 10, 2015,
which was the day following Citrix’s Q1 2015 earnings preannouncement
and when significant speculation of potential activist interest in
Citrix’s stock began
7 Elliott estimates, based on a constant unlevered valuation
multiple and assumes Citrix’s status quo share repurchase plan of
approximately $400 million per year
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Copyright Business Wire 2015