Citrix jumps into server virtualization via XenSource deal

Acquisition, valued at $500M, will mean new competition for market leader VMware

Citrix Systems Inc. today said that it plans to acquire XenSource Inc. in a cash-and-stock deal valued at about $500 million, a deal that will thrust the application delivery software vendor into the server virtualization market.

Rumors had been circulating over the past few days that Citrix would buy Palo Alto, Calif.-based XenSource, which offers both commercial and open-source versions of its virtualization products. The agreement between the two companies was announced one day after virtualization market leader VMware Inc., a subsidiary of EMC Corp., began an initial public offering of 10% of its stock.

Virtualization has become increasingly popular in recent years, particularly as a server technology. Companies are using software from vendors such as VMware, XenSource and Microsoft Corp. to cut down on the number of servers in their data centers by enabling systems to host multiple virtual machines running different operating systems.

Citrix, which already offers desktop virtualization tools, said that the planned acquisition has been approved by both its board and XenSource's. The two companies said they expect to complete the purchase during this year's fourth quarter.

Mark Templeton, Citrix's president and CEO, said during a conference call this morning that the two companies have complementary product lines. He added that Citrix hopes to generate more than $50 million in revenue through XenSource's virtualization products next year and then take a significant share of the overall virtualization market by 2011.

Both companies have strong partnerships with Microsoft and intend to deepen those relationships once they become a combined entity, according to Templeton.

XenSource CEO Peter Levine said his company remains committed to ensuring interoperability between its virtualization products and Microsoft's upcoming virtualization hypervisor, which is code-named Viridian. XenSource plans to build dynamic virtualization services on top of Viridian to give users an alternative to the Xen hypervisor. "We'll be able to offer a choice -- platform virtualization based on Xen or a solution based on Viridian," Levine said.

Once the acquisition is completed, XenSource will form the basis of a new Citrix division that will be headed by Levine, who will report directly to Templeton. Meanwhile, the Xen open-source project will continue under current leader Ian Pratt, who was one of XenSource's co-founders. Levine said that XenSource will develop procedures for independent oversight of the Xen project and bring in a third party to take over some aspects of the open-source initiative.

XenSource currently has about 650 paying customers, according to Levine. Teaming up with Citrix and its 5,000-plus channel partners "really lights up the availability of our product around the world," he said, noting that XenSource executives used Citrix's channel as a model for the virtualization vendor's own sales structure.

Over the past year or so, XenSource has been busy ramping up the enterprise capabilities of its software. On Monday, for example, the company introduced Version 4 of its XenEnterprise software in an attempt to close VMware's functionality lead.

Templeton and Levine said that on the server side, Citrix will continue XenSource's support for storage management, building on a business partnership that the latter company announced last month with Symantec Inc. At the desktop level, Citrix plans to combine XenEnterprise v4 with its own Desktop Server software and incorporate those two technologies other pieces of its desktop software line, including its EdgeSight, Access Gateway, WANScaler and GoToAssist tools.

The desktop virtualization market is still in its infancy in terms of user adoption, and Templeton acknowledged that there is plenty of work to be done on both technology development and raising customer awareness. "We're looking at the promise of a great marketplace," he said. "We'll drive it mainstream in a way that's only just begun."

Levine agreed, saying that the two companies are "looking to unlock virtualization for the volume market."

Copyright © 2007 IDG Communications, Inc.

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