Hard on the heels of virtualization Relevant Products/Services leader VMware Relevant Products/Services's stunning IPO on Tuesday, Citrix Systems announced it is acquiring open-source virtualization company XenSource for $500 million.

Citrix expects the combined server Relevant Products/Services and desktop virtualization market to grow to $5 billion within four years. The purchase means XenSource will be able to compete aggressively in that market, XenSource CEO Peter Levine said. The deal is "about steering into the 90 percent white space that is wide open, both at the server and in new emerging opportunities at the desktop," he said in a statement.

XenSource's virtualization engine is licensed under the GPL and is developed by an open-source community, including engineers at RedHat, IBM, Intel Relevant Products/Services, AMD, and HP.

"Game on now: it's CitiXen-Viridian versus VMware," William Fellows, Rachel Chalmers, and John Abbot, analysts for The 451 Group, wrote in a briefing on the deal, referring to Microsoft's forthcoming virtualization software Relevant Products/Services called Viridian.

The VMware Factor

At $500 million, the size of the deal -- the largest in Citrix's history -- was "undoubtedly inflated" by VMware's IPO, which valued the company at $19 billion, the analysts said. Currently, XenSource has just over 600 customers and $1 million in sales.

Even so, there are several reasons the deal was compelling for Citrix. First and foremost, the analysts said, the deal puts Citrix squarely in the virtualization game and saves Citrix "a couple of years' development."

Crucial to the deal, the analysts added, is XenSource's June 2006 pact with Microsoft, giving XenSource exclusive access to the source code for Microsoft's forthcoming virtualization offering, Viridian. "XenSource is betting the farm that exclusive access to the Viridian code will enable it to create a substantial business Relevant Products/Services selling management tools."

The VMware IPO isn't the only good timing about the deal. XenSource had just released a new version of XenEnterprise that boasts substantially improved management, availability, and ease-of-use features.

The latest version marks "a major shift in strategy," the analysts said. XenSource will now focus on creating management tools for Microsoft's Viridian.

Next Up: Microsoft-Citrix?

While Microsoft won't enter the market for at least a year, the XenSource/Citrix combination positions the companies squarely against VMware. XenSource's existing business allows Citrix to compete against VMware's Infrastructure 3 product today, and, looking forward, "Xen will likely be used to underpin Desktop Server as a viable and cost-effective competitor to VMware's Virtual Desktop Infrastructure," the analysts said.

In addition, XenSource has solid connections with Symantec and Veritas, giving it a crucial link to the storage Relevant Products/Services world, which might offset VMware's relationship with parent EMC Relevant Products/Services.

Could this deal be a prelude to Microsoft buying Citrix? Apparently, Citrix considered buying VMware back in 2003 but was too worried about antagonizing Microsoft to complete the deal. And Microsoft's deal with XenSource "might have" turned into a full-blown acquisition. The reason it didn't happen was likely intellectual property issues over XenSource's use of the GPL. "Open source remains a sticking point for the powers-that-be in Redmond," the analysts said.

But now that Citrix has brought in XenSource, Microsoft could acquire the larger company with fewer concerns about "the awkward GPL aspects of what XenSource does," jump-start its own slow-moving virtualization development, and "not least, get its hands on the lucrative $1 billion enterprise Windows revenues now generated by (Citrix's) Presentation Server," the analysts said. Other potential Citrix suitors include HP and Cisco Relevant Products/Services.

Whether this scenario unfolds, for at least the next year VMware will be the most visible visitor to CIO Relevant Products/Services offices around the country. "Citrix, XenSource, and Microsoft will likely be consumed with building out, integrating and plotting for at least a year once the deal closes, giving VMware time to concentrate on sales," the 451 Group said.