Three Bold Predictions for 2018

Dec 29, 2017

Many of my industry friends who know me know that I like to speculate, make predictions and say who is going to acquire who. Over the coming weeks, I will share these thoughts and put my predictions out there in buckets of three.

For starters, here are my bold, big predictions for 2018.

Prediction #1: Citrix will go Private

Remember when Brain Madden predicted that Citrix would not be around by the end of 2017 – Well, Citrix is not only still around, but I feel they will go big in 2018! Every year we get the prediction that someone will buy Citrix, notably in 2017 it was Microsoft. This year’s big news was David Henshall taking over as CEO and frankly speaking, I feel this is a GREAT move for Citrix because it will help in streamline the company and focus on revenue-driving motions. Let’s face it, being public is NOT fun. You are beholden to your shareholders and judged harshly by ‘the street.’ If you look at Citrix’s performance over the last year they have seen a steady increase in stock price, their net income continues to increase, and their cash flow shows decent growth. What sticks out to me is the outlook for Citrix; they have given 2017 revenue guidance of $2.82 billion to $2.83 billion compared to 3.42 billion last year (17.2% decrease). One could assume the approximately $600 million difference is the finalization of spinning out the GoTo products. What is interesting about this, Citrix shareholders still own 50% of the GoTo products (Reverse Morris Trust), so oddly, Citrix has a stake in LogMeIn. I will do a full financial breakdown when Citrix announces their FY2017 results.

Why do I think they will go private? Their enterprise value is $13.27 billion, and there are not many companies who can afford to acquire Citrix. Microsoft, Cisco, and HPE could, but unlikely. The desktop virtualization market is targeted to only be $13.45 billion in 2020 with a CAGR of 11.4%. In short, Citrix will need to pivot a bit but without the scrutiny of ‘the street.’ In short, Dell paved the way for creative deals, so I feel Citrix will find a way to go private in 2018.

Prediction #2: Cybersecurity Software Space will have Massive Consolidation

The cybersecurity software space is crowded, very crowded. There is a “Cybersecurity 500” list that you can follow to see top companies in the space. The endpoint security market is estimated to be a $17.38 Billion by 2020, at an expected (CAGR) of 8.4% from 2015 to 2020. Another interesting fact is the security as a service market is supposed to be an $8.52 billion by 2020 with a CAGR of 22.2%. This market includes tools like SIEM, endpoint protection, DLP and endpoint remediation. Momentum Partners released their Cybersecurity Review for Q3-2017, and there were 108 M&A transactions year-to-date. The cybersecurity landscape in a snapshot:

Need I say more! I predict you will see 250+ acquisitions and less than 200 financing transactions in the cybersecurity space in 2018. I will spend A LOT of time focusing on cybersecurity in 2018.

Prediction #3: VMware will Finally Gain Independence from Dell/EMC (stretch)

This is unlikely, but VMware is showing strong results, and it seems like nothing can stop them! 11% growth year-over-year from Q3 FY17 to Q3 FY18. Their software-defined networking solution, NSX, grew 100% year-over-year! They repurchased $300 million in VMware Class A common stock from Dell Technologies and completed $555 million of stock repurchases. Their targeted revenue is $7.88 billion (almost three times Citrix), and their free cash flow will be $2.84 billion. Their enterprise value is 43.75 billion, and total cash is $11.61 billion, so VMWare is a contender to acquire, not be acquired. When you look at the deal structure of Dell plus EMC plus VMware, Dell has a 28% economic interest and EMC 53% economic interest, BUT Dell will have 97% voting rights. In short, Dell still owns and control 81% of VMware but will only have 28% direct economic interest. I could write a boring blog on the financials and the notion of buying back stock, but I will keep it simple. Primarily 28% of the shares are owned by VMW HOLDCO LLC (Dell) according to Yahoo Finance (20 million shares). Quick math says $2.5 billion is needed to buy out Dell, but then again we would have to run comparisons to get an accurate view. If we quickly take a look at their enterprise value/EBITDA to get an idea of simple share price (23.65), then look at their debt ($4.23B) and from this calculate their equity value which my quick math says is $39.52 billion. From here we can take the equity value and divide that by the number of outstanding shares (102.14M) to get a share price of $383.16. Then take the 20 million shares and multiply them by $383, and you get $7.660 billion (three times base price) to buy out Dell possibly, BUT this is unlikely since the VMW tracking stock raised approximately $18 billion in the transaction. In the end, VMware will either need to find an institution to buy out Dell and get Dell to vote in their favor. This one is a stretch, but would be interesting if it happens! NOTE: This is based on the stock price on 12/29/2017.

There you have it, my top three bold predictions for 2018. Next, I will focus on the three companies I would acquire if I were Citrix, so watch for my next blog!