Citrix Acquiring XenSource for $500 Million

Updated: The Citrix-XenSource deal comes during an important week for virtualization technology as VMware announced its long-anticipated IPO.

Citrix Systems is acquiring XenSource, whose founders helped develop the open-source Xen hypervsior, for $500 million in a move that caps a significant week in the development of virtualization technology.

The XenSource acquisition, which both companies announced Aug. 15, comes just a day after VMware, which has long been the dominant player in the x86 virtualization market, announced an initial public offering of 33 million shares of stock. By the end of its first day of trading, the companys stock closed at almost $51 a share.

The purchase of XenSource by Citrix also comes a few days after XenSource launched the latest version of its XenEnterprise, which offers several improvements compared to previous versions and looked to compete with VMwares Virtual Infrastructure suite.

The XenSource acquisition, which is expected to close in the fourth quarter, was not totally unexpected. Citrix has been advocating for faster delivery for Web- and Windows-based desktop applications.

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The acquisition is the largest in the history of the company, said Wes Wasson, the chief strategy officer with Citrix in an interview with eWEEK. While the purchase came the day after the VMware IPO, Wasson said that Citrix had been looking at a number of ways to expand its virtualization reach, both at the desktop level and within the data center, for almost a year.

Now with the XenSource, Wasson said that the company not only strengthens its hand when it comes to desktop virtualization and delivering applications to the client, but its also allows it to move deeper into the data center to deliver those types of services to its customers.

"We want to be able to deliver any application to any users over any network," Wasson said, adding that the relationship both companies have with Microsoft, as well as IBM and Hewlett-Packard, gives the partnership a distinct advantage in a market place dominated by x86 servers running Windows.

The companys mission, which it detailed to customers and partners April 9 , has been to securely speed the performance and response time of applications, regardless of whether the applications are Web- or Windows-based or whether they are delivered as terminal services or streamed out to the desktop.

The missing piece to the companys infrastructure is the presence of a hypervsior virtualization technology to help deliver scalability and allow for the allocation of resources found in a utility model. In an Aug. 9 research note to investors, Credit Suisse analysts argued that Citrix would need virtualization technology from one of the Xen-based vendors – XenSource or Virtual Iron – to help the company along in its strategy.

The acquisition is also expected to strengthen Citrixs relationship with Microsoft. Recently, XenSource announced an agreement between itself and Microsoft that will allow interoperability between its products and the forthcoming "Viridian" hypervsior.

Frank Gillett, an analyst with Forrester Research, said Citrixs acquisition of XenSource will help the company to quickly develop its desktop virtualization strategy. However, its unclear how it will help Citrix in developing a much broader business in IT infrastructure, since the market is already dominated by the likes of Hewlett-Packard and IBM.

"The name Citrix does not really roll off he tongue when it comes to server virtualization," Gillett said. "For one, they are going to have to teach their sales force to go after customers in a whole new way. Its also a very big transition for XenSource. What Citrix has done strikes me a very ambitious and difficult move."

When the deal closes later this year, XenSource and its employees will form a new division within Citrix called the Virtualization and Management Division. Peter Levine, who leads XenSource now as CEO, will head the new division and will report to Mark Templeton, president and CEO of Citrix.

In an interview, Levine said the acquisition would not mean a change for XenSource and he expected business to continue as it has. Both companies will make some separate announcements as the year continues before they announce the integration of some Citrix products with XenSource technology.

The deal will also likely have some significant impact on the virtualization market. Now that at least of portion of VMware has gone public – EMC still owns about 87 percent of the company – the market is only expected to grow.

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Although VMware has owned the virtualization market almost exclusively for the last several years, the company now faces competition from two larger vendors, namely Microsoft—with its hypervisor—and now Citrix.

XenSource now has about 500 paying customers and has signed two recent agreements, one with Symantec to develop storage and other applications for its XenEnterprise platform, and the other with NEC, which will begin embedding XenSources products with its x86 servers.

The Citrix-XenSource deal might pressure VMware to drop the price on some of its products. To increase the pressure, Citrix announced that it will begin selling XenSources products through its roughly 5,000 channel partners, which will give the companys technology a much broader reach.

In the short term, Gillett does not see much change in the market. However, as Citrix and XenSource begin to build credibility, the acquisition, along with its relationship with Microsoft, could change the market.

"I think at the end of the day, youre going to have stronger, more competitive pricing," Gillett said.

In a research note, Stuart Williams, an analyst with Technology Business Research, wrote that even with the additional competition, it will be difficult for any company, even Microsoft, to catch up with VMware at this point.

At this point is seems that despite the combination of Citrix and XenSource, and Microsofts forthcoming update of Virtual Server, the server virtualization market is VMwares to lose," Williams wrote. "Without a competing high end product from Microsoft, and since XenSource was initially focused solely on Linux installations, VMware has benefited greatly from a lack of competition in the market."

As for the open-source Xen project, Levine said the work on the hypervsior would continue and that he was working with some of the members of that community, including IBM, HP and Intel, to develop an oversight committee to provide additional transparency.

"I think this will be really great news for the open-source community and I think things will continue at a minimal pace as they did before and I think it will get much better and have more transparency with the additional community oversight," Levine said.

Editors Note: This story was updated to include information and comments from analysts and Wes Wasson, the chief strategy officer with Citrix.

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