Citrix Acquisition – NetScaler 2005

Citrix acquired NetScaler in June 2005. For $300 million dollars, Citrix bought the company that specializes in improving the performance of applications across remote networks. The NetScaler acquisition filled a gap related to guaranteeing decent throughput between the users and the servers providing the applications.

I didn’t go to this due dilligence but I did hear some news about the company. This was our first acquisition that had engineers in India. In fact, it is a fairly large group and is the basis of doing more work based out of the India workplace. NetScaler is now tied to other acquisitions that happened after it. Both Teros and Orbital Data products have been bundled with the NetScaler product family line to form the Citrix NetScaler and WanScaler line.

The overall strategy of acquiring NetScaler fits with the vision of providing an end-to-end solution for customers that provides a unified experience with the best results across the board (performance, reliability, and cost). Like the press release says, Citrix is providing this from an application point of view and therefore provides a better integration than the typical hardware based companies that are competing with this solution.

The investment in NetScaler and Orbital Data proved to be highly strategic for Citrix in a very short period of time. Microsoft and Citrix have announced that they will collaborate on a product destined to make branch offices more manageable from a computing point of view. Termed “Evergreen”, Citrix will provide the infrastructure for Microsoft to provide a solution for its customers with the current branch office issues. Have a look at the Microsoft and Citrix press releases. It’s becoming more obvious that typical software providers are moving into the networking space. This is good since the future is all about getting the applications to live anywhere on the network.

Finally, I wanted to add my own twists to this subject. Citrix has fully embraced the concept of doing more to bring all the pieces together. This was originally driven by the desire to diversify away from just having one product years ago. Now, it is about trying to find the right balance of what customers want versus what it currently technically possible. The acquisitions in this space have been very positive and have strengthened the position for Citrix to provide a framework for customers to do their work without having to worry about things not working well together. Think of it like getting an operating system to span the Internet. That’s what is coming. Distributed computing is on the horizon and Citrix is getting ready for that by investing heavily in the network that is going to provide the life blood for the applications that are going to flow between the users and the servers that provide them. Believe it or not this is not marketing speak. This is the future. And it is starting to happen now. 🙂

Here is the Citrix press release about the NetScaler acquisition:

Citrix To Expand Access Platform with Acquisition of NetScaler

Citrix Aggressively Driving Its Strategy to Enable the Best Access Experience for Every User and Every Application — Everywhere

FORT LAUDERDALE, Fla — 6/2/2005 — Citrix Systems, Inc. (Nasdaq: CTXS), the global leader in access infrastructure solutions, today announced it has signed a definitive agreement to acquire privately held NetScaler, Inc., a global leader in high-performance application networking. The transaction is valued at approximately $300 million in cash and stock, plus the assumption of approximately $23 million in unvested stock options. The deal is expected to close in the third quarter of 2005 subject to customary closing conditions including shareholder and regulatory approvals.

NetScaler, founded in 1998, is based in San Jose, Calif., and has approximately 200 employees, with research and development teams in Silicon Valley and India. The company pioneered the market for next-generation application networking acceleration and initially rose to prominence in the Internet market, delivering technology to top companies such as Google, Amazon, Dow Jones, Earthlink, E*Trade, MSN and Ticketmaster. Today, NetScaler estimates that up to 75 percent of all Internet users go through a NetScaler system each day. NetScaler now has more than 500 enterprise customers and over 3,000 deployments of its award-winning products, including Fortune 500 leaders Merrill Lynch, JC Penney, 7-Eleven, Blue Cross, Ford and United Airlines, and is consistently ranked number one in both performance and customer satisfaction.

“This is an exciting acquisition for Citrix,” said Mark Templeton, president and chief executive officer for Citrix. “We’re aggressively pursuing the strategy we outlined in early 2003 to expand into high-growth markets adjacent to the access infrastructure market through building and acquiring best of breed access infrastructure technologies.”

“With this acquisition, our existing customers will further lower costs and increase the performance of their Citrix Presentation Server systems, and we’ll be able to offer greater performance and lower costs for customers deploying Web-based applications and services.”

“NetScaler extends our best access experience value for the entire range of Web-based applications, including enterprise, browser-based, XML Web services, and others. And, with NetScaler accelerators, Citrix customers can significantly optimize their entire set of legacy, client/server, or three-tier applications delivered on our Presentation Server system,” said Templeton.

“By adding NetScaler products to the Citrix Access Platform, we are the only company offering a complete system that provides end users with the best access experience and delivers cost-saving benefits to IT staffs through reduced overhead, enhanced security and increased manageability of all enterprise applications and resources.”

Bringing a New Level of Intelligence to OSI (Open System Interconnection) Layers 4-7
NetScaler products will extend the Citrix Access Platform and provide a range of application networking solutions. Application networking is a fast-growing, emerging segment of the overall networking market expected to grow to about $3 billion by 2007 according to market research. Unlike traditional networking products that focus on the underlying connectivity between systems and networks, application networking solutions provide application layer intelligence called “application fluency.” This ensures that every user receives the best possible access experience based on their role, device, network and location, as well as the specific application or service being accessed. And IT organizations can reduce the overall costs in their data centers by reducing network overhead and the number of servers needed to run enterprise applications.

While some traditional networking products may be “application-aware,” only application networking products can make networks truly “application-fluent.”

In addition, with NetScaler adding to the built-in intelligence of the system, the Citrix Access Platform will dynamically choose the best possible delivery method for each access session, automatically sensing and responding appropriately to each user’s access scenario to deliver the best access experience.

Strong Execution on Citrix’s Growth Strategy
In 2004, Citrix completed two acquisitions as part of its strategy to drive growth by offering the industry’s most complete, integrated access platform. In the first quarter, Citrix acquired Expertcity, now the Citrix Online division, moving the company into the real-time collaboration, desktop access and on-demand assistance markets. In the fourth quarter, Citrix acquired Net6, now the Citrix Gateways division, extending Citrix’s reach in the SSL VPN (secure socket layer virtual private network) and IP (internet protocol) telephony markets.

“This is a great move for Citrix and a great fit for NetScaler. Both companies are committed to making customers successful and improving the experience for end users accessing any application,” said B.V. Jagadeesh, president and chief executive officer for NetScaler. “Our combined teams will be a powerful force in providing the infrastructure required for intelligently controlling access and delivery of any application or resource based on the end-user’s scenario. Further, we expect that the demand for NetScaler products will grow significantly as we leverage Citrix’s 5,000 plus resellers in more than 100 countries – one of the most loyal and well developed channels in the industry.”

“NetScaler will bring to Citrix key leadership, award-winning products and critical competencies in the areas of networking and security,” added Templeton. “Further, the NetScaler business culture is a great fit with Citrix in terms of shared values, a passion for customer success and a desire to deliver complete end-to-end access solutions for on-demand computing. The NetScaler team will give Citrix increased presence in Silicon Valley and the ability to attract top industry talent in the Bay Area to keep pace with our plans for continued rapid growth.”

Terms of the Deal
Under terms of the definitive agreement, Citrix will acquire NetScaler for approximately $300 million, payable in approximately 45 percent cash and 55 percent stock. Citrix will also assume approximately $23 million in unvested options. Assuming the transaction closes as expected, the transaction is expected to result in approximately a $5 million to $6 million expense charge for in-process research and development (IPR&D) in the third quarter, which equates to approximately $0.02 to $0.03 per share on a GAAP basis. The remaining purchase consideration will be allocated among acquired net tangible and intangible assets and goodwill.

For the three months ended September 30, 2005, the transaction is expected to add $5 million to $6 million in revenue and is expected to be $0.06 to $0.07 dilutive to Citrix’s earnings per share on a GAAP basis, and $0.02 to $0.03 on an adjusted basis to exclude the effects of amortization of intangible assets, write-off of IPR&D and compensation expense.

For the three months ended December 31, 2005, the transaction is expected to add $10 million to $12 million in revenue and is expected to be $0.05 to $0.06 dilutive to Citrix’s earnings per share on a GAAP basis, and $0.02 to $0.03 on an adjusted basis to exclude the effects of amortization of intangible assets and compensation expense.

For 2006, the transaction is expected to add between $58 million and $60 million in revenue. In the first half of 2006, the transaction is expected to be $0.11 to $0.12 dilutive to Citrix’s earnings per share on a GAAP basis, and $0.05 to $0.06 dilutive to earnings on an adjusted basis to exclude the effects of amortization of intangible assets and compensation expense. In the second half of 2006, we expect the acquisition to be dilutive on a GAAP basis and neutral to accretive to earnings on an adjusted basis.

The acquisition has been unanimously approved by the board of directors of each company. The acquisition is expected to close during the third quarter of 2005 and is subject to closing conditions including regulatory review and approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, approval by the stockholders of NetScaler and other customary conditions.

NetScaler will continue to operate in San Jose, Calif. as the Application Networking Group, and will be led by B.V. Jagadeesh, reporting to Citrix CEO Mark Templeton.