Citrix to buy virtualization company XenSource for $500 million

One day after the spectacular public offering of virtualization company VMware, Citrix Systems on Wednesday said that it intends to acquire open-source virtualization company XenSource for about $500 million.

Citrix makes so-called thin client software that delivers business applications from servers to desktop computers.

By acquiring XenSource, the company intends to move into the adjacent server and desktop virtualization market.

The acquisition will be financed through a combination of stock and cash and includes the assumption of $107 million in a vested stock options.

The company's open-source "hypervisor" software, called Xen, lets a single computer run multiple operating systems simultaneously, which is a useful way to replace servers with one, more efficiently used computer.

Xen is included in the two most used Linux server distributions from Red Hat and Novell and also works on Microsoft Windows. XenSource's commercial offering, XenEnterprise, is based on the Xen software.

Gartner analyst Tom Bittman said that the price tag was high for XenSource and the acquiring company is a surprise.

"We wouldn't have expected Citrix to make the acquisition. We would have expected IBM, HP, Oracle, maybe Novell or Symantec," he said.

Virtualization has become a hot technology in IT because it allows corporate customers to lower their computing costs by packing more computing jobs onto fewer computers. The virtualization market leader VMware went public yesterday, with its stock price shooting to $51 from its offering price of $29.

The purchase is a significant departure for Citrix whose focus now is centralized management of desktops, rather than managing corporate data center servers, Bittman said.

Also, the deal raises questions over Citrix's relationship with Microsoft. He said that Citrix could choose to compete head-to-head against Microsoft's forthcoming server virtualization software called Viridian, or Microsoft could choose to use some of XenSource's software rather than develop itself.

"The market needs competition in this area. Customers need strong competitors to VMware...because prices have been artificially high," he said. "If this acquisition makes Xen and XenSource more viable, it's a good thing for the market."

The Xen software and XenSource employees will form a new Virtualization and Management Division at Citrix headed by XenSource CEO Peter Levine. In a statement, Levine said that the company intends to expand further into server virtualization as well as desktop virtualization.

"This move is not about competing for the 5 percent of the market that is already being served. It's about steering into the 90 percent white space that is wide open, both at the server and in new emerging opportunities at the desktop," Levine said in a statement.

The combination of XenSource and Citrix's established distribution infrastructure will make XenSource's software available to a far larger audience, said Nick Sturiale, a general partner at Sevin Rosen Funds and a XenSource board member.

"XenEnterprise (version) 4, which is a tour de force product, just came out. Now it can go through Citrix's 5,000 channel partners which is going to be a very exciting spin-up, making it available to a much broader market," Sturiale said.

In a report, research group the 451 Group said that the acquisition stands to turn the competitive heat up on VMware.

"The virtualization market now revolves around three players: market darling VMware; Citrix's combination of young blood and old money; and the (potential) threat of Microsoft's Viridian, slated to ship in Q3 2008. Both Citrix and VMware have a 12-month window of opportunity before Microsoft shows its full hand," the report said.