[joschmo]

Background on the deal. TIBCO was acquired by Vista Equity Partners 8 years ago and has been a disaster investment. Growth never picked up despite their investments in product, technology, sales and marketing. As a result, TIBCO was stuck selling better software from acquisitions to their existing customer base. Large cap private equity investors like Thoma Bravo, Silver Lake and Blackstone noticed TIBCO's failures making it difficult for Vista to exit their investment. TIBCO has been perpetually on the market for sale since 2017.

Vista's "solution"? Vista managed to push a portion of the equity to Evergreen (Elliott Management's PE arm), and are building a Broadcom or CA Technologies style mammoth of legacy software by calcifying their technology in F500 and low-technology end markets. Their next merger to further feed the beast is Citrix.

Today's problem? The merger requires billions in debt to pay Citrix's public shareholders, which is put on the merged company's new balance sheet. The market was great when the deal was signed almost a year ago and when the large banks signed up to syndicate (sell to smaller investors) the entire debt balance. Unfortunately, as the debt syndication process was underway, the market turned and the typical investors in these huge tranches of LBO debt were no longer interested. That means the big banks were left to fill the balance of what they couldn't syndicate (contractual requirement) by taking on that bad paper themselves. It's bad paper because the banks commit to the LBO investors they'll get the investors to sign up at a 4% interest rate when any investor would probably ask for 7.5-9% now. Believe 8-10 banks are stuck holding something like $2-3 billion.

The Resolution. Deal got done and the LBO investors forced the banks to eat the losses. Now this black hole of a company will continue to grow until it gets foisted on a company like Broadcom or IBM that would be happy to churn out billions in cash from it. PE firms win. Merged company wins. Banks lose. Employees will lose as massive waves of layoffs are done to "eliminate redundancies" because they won't need two complete HR, finance, IT, legal, etc. teams. And billions in cash flow will be generated as a result.

[snake_doc]

Your background missed Elliot’s 5yr+ activist history towards Citrix since 2015, with a brief break around 2020. At the time of this deal, they owned ~12% of Citrix. After 2020 board changes, Elliot bought back into Citrix around Q3 21, so at best around $95-100/sh. This deal pays out $104/sh. So it’s almost a rollover from their equity to PE fund.

Elliot is obsessed with Citrix, and this is furthering their conviction with leverage to boost their opportunity.

[joschmo]

You're right that it's not paying out Vista much if anything at all when you account for fees, but it's still a nine-figure sum of new money in, which is lifeblood for these zombie B2B software companies to get a few more shots on goal to fix their situation.

[transpute]

Recap of Elliot saga (included ex-Microsoft CEO for 18 months, with $24M signing bonus and $32M severance), https://www.enterprisenetworkingplanet.com/news/citrix-hensh...

[kolbe]

I disagree this is necessarily good for PE. PE/late stage VC used to have a game plan for how to dress these companies up to get huge growth multipliers, and then stick them in the S&P 500, but that game looks dead. Tiger Global was the poster child for this, and their -50% returns this year should be sending everyone back to the drawing board.

Unless Vista really thinks they can manipulate the old tech companies the way Figma's investors worked over Adobe, then I don't think the results will be great.

[joschmo]

This is a completely different universe from VC, Tiger, Figma or even the public markets. Software companies like this (low growth, high cash flow) got absolutely eviscerated in the public markets over the last decade so they would never consider that. And TIBCO is about 20 years out from the growth they needed to attract VC money or money from Tiger. Won't bother with the Figma exit comparison. The universe of buyers after this company will either be a mega-club deal with a mix of PE firms, pension funds, sovereign wealth funds, etc. or one of the hulking B2B software giants I had mentioned.

No matter how you want to couch it, PE firms got away with this one. They're content to grow the topline 4-8% per year and cash flows 10-15% (the real metric that matters because the company isn't growing enough to ever be valued on a revenue multiple but will be valued on an EBITDA or FCF multiple). At roughly 15,000 combined headcount today, I'd expect that number to be under 10,000 in 24 months.

[eru]

Honestly, this seems all rather reasonable?

These companies are basically dying. So might as well manage the decline and return money to investors.

It's good for the economy as a whole if employees move to other companies; instead of engaging in make-work.

[joschmo]

It's macro-good and micro-bad.

On the good side, I was allowed to view this from the perspective of spreadsheets and board meetings and see the net gains. And also do follow-up analysis that showed the least product people retiring or moving to lower quality work while the most productive went on to do 10x better things.

The dark side isn't pretty. We still had to lay off tens of thousands, affecting hundreds of thousands indirectly localized to a handful of communities and cities. I've decimated neighborhoods before by the literal definition (10%+ move out to find work in other cities). And the data tells us that at least a couple of those people will die as a result of the layoffs at the 10K+ scale. Can't talk macro-productivity when that's happening. Too tone deaf.

[pramodbiligiri]

In what terms are deals like these discussed internally? Your analysis was very matter-of-fact. Do internal documents speak the same way or do they have to dress it up in elaborate positive sounding lingo? (synergy, growth opportunity and the like).

[joschmo]

Depends on the audience. Am I having a ground-truth level conversation with my deal team? Then everything is neutral. No positive or negative tones. Just assessment of what is good and bad, what could go right or wrong, and the process to build the probabilistic fan of outcomes that drives our target returns.

To my investment committee? We're in sell mode and using the positive coded language you outline. "We see $350M in day 1 synergies (this means fire thousands of people immediately). $600M by the end of our 180-day plan. And $1b by completion of our value creation plan 365 days post-close. This builds in a 1.8x floor for cash flow growth even if we're delayed in synergy realization and frees up cash for our go-to-market investments. Given the current GTM org returns $1 of ARR for every $1 spent, and our current market analysis of total whitespace, we plan on investing 30% of every dollar saved into our sales and marketing initiatives and additional 5% in a product refresh focused around key sales rep pain points like UI/UX and ease of use."

Even when we're selling to our IC, it's still very factual because these people are professional BS-detectors.

[boeingUH60]

I was mind-blown when I found that you could do this...effectively buying a company with that company's own money.

Michael Dell acquired EMC that way, and with some financial engineering, came out ahead with a few ten billions.

https://www.forbes.com/sites/antoinegara/2021/08/03/deal-of-...

[bruce511]

It doesn't matter. At the end of the day it's all your money anyway, just in a different place. The following is a simplification, but the concept should (I hope) be clear.

Let's say you want to buy an asset that can generate revenue. Let's also assume you need to borrow the amount, that you don't have it lying around.

You could take out a loan, and back it with some other asset, like your car.

Or you can get the company to take out a loan.

If the Company makes money, that money goes to servicing the debt. Either way its "your money" servicing the debt.

There are reasons to select one approach over the other, but putting the loan in the company name is often better for tax, and personal asset protection, reasons.

So yes, you buy the company with its future profits, but ultimately that's why you buy it in the first place.

[that_guy_iain]

I would love to know what happened in these companies that failed after someone bought it then ploughed tons of money into them.

Having just left one, the core reason for the failure was a tech plan forced upon two companies that was so unrealistic it was always going to fail. A bit of me thinks it's the problem was the investor for setting up a terrible plan. But realistically, I think it's more the management of the two companies inability to explain to a growth board that you can't rewrite a 7-year application in 3-months.

Original Plan: Migrate extra features and data over to new platform 3-months. If it's just a migration it's a bad timeline but overal not a bad plan. Problem was, it was a rewrite. The new platform didn't have the core features.

3-months pass: The growth board invests more money increases time and focuses everyone to this. While everyone keeps calling it a migration.

Another 3-months pass: The growth board invests even more money, increases the dev team, hires consultants who have help with such programs in the past.

Another 6-months pass: Still not delivered. Patence is getting thin. This was meant to be a 3-month project and it's been a year and we're not there. Extra time given with being features removed from scope. Delivery date announced to partners.

Another 3-months pass: Delivery date coming up, announcements made they will migrate on the deadline.

1-week before delivery: Team find out core functionality still doesn't exist. Announce another 3-4 month delay. Patience getting very thin.

Next deadline: They release a half finished product because management is going to get fired if they don't.

Result: Investor realises everything has gone wrong. After about €50-100 million investment Tries to sell company for €400 million. Drops price to €200 million. Sells for €75 million while clearing debt. Announces €50 million gain.

While the pressure from the owning company did cause issues, the original issue comes from the fact someone let them think it would originally be a 3-month project. This is not to mention that developers were telling the company management these deadlines couldn't be met, including 6-weeks before the first announced delivery date yet they continued to try and go forward until they realised at the last minute they couldn't meet the deadline. Every time it was at the last minute they would announce the deadline couldn't be met. Every 3-4 months the teams were working toward deliverying on a deadline.

[arkadiyt]

Thanks for this succinct analysis - you should start a finance newsletter!

[oconnor663]

> until it gets foisted on a company like Broadcom or IBM that would be happy to churn out billions in cash from it

How does this part work?

[kjellsbells]

The acquiring company basically cranks up their fees to the acquired customer base to weed out anyone that a. doesn't have deep pockets and b. has an alternative. The customers they are left with are then stuck with you and you can continue to ratchet up prices while cutting costs for years. of course this requires that the software in use is hard to replace, or in the parlance, has a big moat. if you get it right you can make billions with this strategy. after all, an unhappy customer makes more money than a happy prospect.

conversely, any start-up that can bridge the moat is guaranteed a thrilling ride.

[pas]

the vendor lock-in!

also, very important, if a company that is already a big powerful vendor buys this, then they can use their already existing leverage to ramp up prices. after all all now they can try to - and eventually will - upsell all kinds of shit, they will milk every "synergy" opportunity they can think of, will offer package deals (that look very good on paper, but of course increases the lockedin factor, and hides the real problem of keeping the company on the legacy shit).

[ironSkillet]

My guess is ruthlessly cut costs and gradually degrade remaining customer good will until it's a dessicated corpse.

[joschmo]

The cost portion is right but good will from these companies degraded a decade ago. The game is now to do anything at all costs to prevent churn and downsells whether that's bribery, lying, cheating, stealing, lawsuits, etc.

[gumby]

Thanks! I was wondering how TIBCO could possibly still be around.

[whydoyoucare]

And I was wondering how Tom Krause heads the combined company (he was leading Broadcom's software arm until a few months ago!)

[gumby]

On one hand it can suggest, "so much going on -- how can I keep up?"

On the other hand: who wants to keep up with goings-on at places like TIBCO?

Though when it comes to Broadcom: it's news when their CEO isn't dealing drugs from an underground sex lair.

[vood]

Thanks. Some very deep insights and market knowledge. Impressive.

[gigatexal]

Do you moonlight as a financial analyst for tech corporates? Cuz this was super informative. Thank you!

[fblp]

Thank you for the succinct analysis. It makes me wonder if the PE firms that think of these deals are borderline sociopaths - caring a lot more about money then people. It ALMOST reads as a sophisticated scam.

[scaramanga]

Haha, yes, "almost" :)

[mindentropy]

Do you have some dirt on the Infineon - Cypress deal? I am not very confident with how Cypress was doing.

[acchow]

Any chance you have a business blog?

[eru]

> [...] this black hole of a company [...]

> [...] massive waves of layoffs [...]

Given that you seem to like neither the ingredients nor the result of the merger, shouldn't you be happy, if they release workers so that they can join more societally productive ventures?

[joschmo]

I'm trying to be descriptive, not prescriptive. It's a black hole because these machines will acquire anything and feed it through the cash flow machine. Massive waves of layoffs because there will be multiple 1K+ layoffs coming over the next year or two as they execute the integration plan.

Massive waves of layoffs are bad for most people and usually great for the company but I won't put a value judgment on it. Some think it "leaves them free to pursue more productive things" and others think "that person is going to struggle for a while due to corporate greed for cash flow." Candidly, I've done several of these deals before where we merge two companies of similar complexity and lay off 50-70% of the combined headcount. The company almost always turns out better for it. Things are that inefficient past a certain FTE size.

For those laid off, it's a different story. An internal analysis done by consultants my team hired 3 years after a multi-stage layoff of 10K people found that >50% of those affected were materially worse off and only 10% were better off. Statistical analysis on the strongest prediction of negative outcomes was age. Nothing else was even close to as relevant.