Hard on the heels of virtualization leader VMware's stunning IPO on Tuesday, Citrix Systems announced it is acquiring open-source virtualization company XenSource for $500 million.
Citrix expects the combined server 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, 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 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 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 world, which might offset VMware's relationship with parent EMC. (continued...)