Citrix Partners: Elliott Management Pact, CEO Exit Will Drive Sales To VMware

Solution providers Tuesday said a Citrix Systems "cooperation" agreement with activist investor Elliott Management Corp. and the impending exit of CEO Mark Templeton have them looking at shifting business to rival VMware.

The CEO for a top Citrix enterprise partner, who did not want to be identified, said the shakeup solidifies his move to abandon his Citrix practice and put even more resources into the company's VMware partnership. "They are no longer a strategic vendor for us," said the CEO upon learning of the Citrix makeover. "There is no collaboration between the teams. We have to drive everything, and it is draining resources for us. It is costing us a lot of money. We are just going to let that practice fall apart."

Another CEO for a top Citrix enterprise partner, whose Citrix business is growing at double digits, said the upheaval will also cause him to develop tighter ties with VMware. "This will probably be good for shareholders but for Citrix partners, this creates a lot of concern and makes me unsure of what to do," said the CEO. "My first reaction is, I'm going to want to get closer to VMware. I hate to say that, but that is part of this."

[Related: Citrix VARs Protest Elliott Management Activist Makeover Plan]

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Citrix shares were up 3 percent, or $2.37, in after-hours trading, to $72. That was on top of a 1 percent increase with shares closing Tuesday at $69.63.

As part of the cooperation pact with Elliot Management, a hedge fund that owns 7.5 percent of Citrix shares, Elliott Senior Portfolio Manager Jesse Cohn, who has been pushing for the sale of major Citrix business units and a paring down of Citrix's channel ranks, will be appointed to the Citrix board of directors.

Cohn, who is also pressing for major changes at VMware parent EMC, replaces Asiff Hirji, who is stepping down from the Citrix board immediately.

As part of the board makeover, Citrix is starting a search for what it called an "additional independent board member, mutually agreeable to Citrix and Elliott, who will replace a current board member when appointed."

As part of the truce, Elliott has agreed to a standstill with regard to "voting and other provisions" for at least one year.

Besides the board upheaval, Citrix announced that President and CEO Mark Templeton plans to retire. Citrix said that Templeton, who has been president of the company for 27 years and CEO for the past 14 years, will continue to serve until a successor has been appointed.

The Citrix board said it has initiated a CEO search process and has retained Heidrick & Struggles, a leading executive search firm, to assist with the process of identifying and evaluating candidates.

The upheaval came as Citrix reported better-than-expected results for its second quarter ended June 30. The company reported non GAAP net income of $163 million or $1 per diluted share on a 2 percent increase in sales, to $797 million. The Wall Street consensus was earnings per share of 82 cents on sales of $790.28 million.

Besides the board and management changes, Citrix said it is exploring strategic alternatives including a possible sale or spinoff of its GoTo family of products. In addition, Citrix said it is in "active discussions" to sell its ByteMobilebusiness.

Citrix also announced that its board of directors has formed a new Operations Committee, which will be led by current board member Robert Calderoni, in order to undertake a "comprehensive review" of Citrix's operations and capital structure.

The operations committee will be made up of four directors, including Cohn and the mutually agreed-upon new independent director. Citrix said it will announce the committee's findings once the review has been completed.

As part of the new initiative, Calderoni, a former CEO of enterprise software maker Ariba Inc., has been appointed executive chairman of the board, effective immediately. In addition, Thomas Bogan, the CEO of cloud performance management vendor Adaptive Insights, will assume the role of lead independent director.

The enterprise CEO, whose Citrix business is growing at a robust clip, said he is sure the Citrix upheaval will have ripple effects in the sales trenches, with customers eyeing VMware as an alternative. "VMware is going to play this up like you wouldn't believe," he said. "You have a lame duck CEO with no actual candidates in mind for CEO. What kind of support do you think there will be for current products from the new CEO?"

The CEO said he sees the Citrix makeover raising a lot of questions with regard to Citrix's channel commitment. "There is a lot of channel connection and emotion around Templeton," he said.

Elliott Management, for its part, in a letter to Citrix in June, said that Citrix needs to make changes to its channel strategy. "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," Cohn said in the letter to the Citrix board.

The CEO for another Citrix enterprise partner, who did not want to be identified, said it is the end of an era for Citrix, which has built a considerable channel business over many years. "Citrix is just not as critical to us as it once was," he said. "Citrix got boxed in. The hypervisor market is a two-game show with VMware and Microsoft. I'm not going to lose any sleep over this. They are just not strategic to us."