Citrix to accuire XenSource for $500 million

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

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. 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.

Source.