Citrix Bags XenSource for $500M

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Networking specialist Citrix has bought privately held virtualization vendor XenSource for $500 million in cash and stock, as the vendor looks to link desktop, server, and storage virtualization. (See Citrix Acquires XenSource and Xen & the Art of Virtualization.)

Speaking on a conference call this morning, Citrix CEO Mark Templeton explained that the deal adds to his firm's current virtualization offerings. (See Application Virtualization Takes Hold and Up the V Stack.) "This clearly positions us as the only vendor providing solutions for desktop, application, and data center virtualization," he said, explaining that XenSource adds the server and storage parts of this equation.

XenSource has ramped up its storage virtualization efforts during recent weeks, signing an OEM deal to embed Symantec's Storage Foundation product line into its flagship XenEnterprise offering. (See Symantec Drifts Into Xen and XenSource Signs Symantec OEM.) Earlier this week the vendor unveiled the latest version of XenEnterprise, adding yet more flesh to the bones of its storage strategy. (See Storage Virtualization Strides On and XenSource Unveils XenEnterprise v4.)

The initial signs are that XenSource's 80-strong workforce will move over to Citrix when the deal closes in the fourth quarter. "XenSource has the people, product, and technology that we need to accelerate our time to market," said Templeton, adding that XenSource CEO Peter Levine will head up a new virtualization division within Citrix.Although Citrix did not reveal its roadmap for integrating the XenSource product line, the vendor did confirm that the startup's offerings will be built into its own products in desktop and application virtualization. (See Citrix to Buy NetScaler for $300M, NetScaler Acquired by Citrix and Wanted: Virtual Desktop Services.) "You will see announcements about product plans and partner plans over the next few months," explained Templeton this morning.

Despite Citrix's spiel, pulling the two companies together will be easier said than done, according to Forrester analyst Frank Gillett. "To me, Citrix wasn't the obvious choice to buy XenSource," he said. "Other than some products that they have around security and networking, they are not known as an infrastructure company.

"I think that they have chosen a challenging and difficult task, but if they succeed in becoming a challenger to VMware, the rewards will be there."

XenSource, which made the Byte and Switch Top 10 startup list this time last year, is increasingly considered a viable alternative to virtualization giant VMware. (See Top 10 Startups to Watch, VMware IPO Nearly Doubles the Goal, and The Other Side of VMware's IPO.) XenSource's decision to align its technology closely with Microsoft's virtualization strategy is seen as one its key strengths, and was repeatedly referred to during this morning's conference call. (See XenSource.)

In particular, execs highlighted the fact that XenSource will run on Microsoft's Viridian hypervisor, which lets multiple operating systems run on the same piece of hardware and is expected sometime next year. "We're committed to the development of a product suite that is compatible with the future Microsoft virtualization products," said Levine.Citrix CEO Templeton explained that this will form the basis for a host of new products. "We will be building dynamic virtualization server management and additional tools on top of the Viridian base," he said. "We will build the same products that we have built on top of the Xen hypervisor on top of Viridian."

The networking vendor is also getting its hands on XenSource's customer base of more than 500 firms following today's deal, which includes the likes of the Nasdaq , Harvard University, and the Miami Herald newspaper. (See XenSource Exceeds 500 Customers.) Citrix expects XenSource to add around $1 million to its revenues in the fourth quarter of this year, and around $50 million next year.

XenSource, founded in 2004, was spun out of an open-source project at Cambridge University that started in 2002. The Cambridge project -- called Xen -- aims to boost the performance of virtualized applications running on multiple servers through the deployment of a specialized hypervisor.

Hypervisor software is at the heart of virtualization efforts from the likes of XenSource, VMware, and Virtual Iron, although some users have urged vendors to enhance the technology. (See Wall Street Virtually Guarded, Virtually Secure, XenSource Reveals Upgrade, and Virtual Iron Dangles iSCSI Savings.)

One analyst on this morning's call got a laugh when he attempted to make a parallel between Citrix's Templeton and Sun CEO Jonathan Schwartz, who has become one of the industry's biggest advocates for open-source technologies. (See Sun Micro Donates Storage, Sun Optimizes Solaris 10, and Sun Opens Up on NAS.)"Mark, now that you're working aggressively in the Linux space, I guess that a pony-tail will be next?" asked the analyst.

"I don't have enough hair for a pony tail," replied Templeton, laughing.

In trading today, shares of Citrix rose 75 cents (2.29 percent) to $33.51.