Citrix Systems has agreed to acquire XenSource for $500 million and said it will exploit the open source virtualisation infrastructure vendor’s technology to secure 20% of the emerging multi-billon dollar server and desktop virtualisation market within two years.

As the leading supplier of server-driven desktop computing based on Windows Terminal Services (WTS) Citrix has watched as companies, such as VMware, have enjoyed growing demand for alternative virtual desktop infrastructure (VDI) products. Citrix’s acquisition of XenSource gives it the virtualisation technology expertise it needs to counter this competition, and to hasten its own entry into the server and storage virtualisation markets.

Wes Wasson, the company’s VP of worldwide marketing, denied that Citrix is now set to clash head-on with VMware, and claimed that “there is enough white space out there” in the virtualised infrastructure market to accommodate multiple players.

In fact, once the deal is finalised in the fourth quarter this year, Citrix plans to make XenSource the basis of its new virtualisation and management division under the leadership of XenSource’s CEO Peter Levine. This division will hardly be able to avoid competing directly with VMware, which is currently credited with controlling 85% of the virtualisation software market.

VMware’s highly successful initial public offering went ahead barely 24 hours before Citrix agreed to pay what might otherwise have been considered an exorbitant price for XenSource, a company with barely any revenue. However, having launched 10% of itself on the market at $29 per share on Tuesday, VMware finished its first day as a traded public company with $1 billion in the bank, and a share price up 76% at $52.

This stellar performance is based on the perception that VMware is the clear leader in an emerging market for infrastructure software that has the potential to topple the present industry status quo and make VMware, and its parent EMC, as potentially powerful and as large as Microsoft, Oracle or SAP.

Prior to its acquisition by Citrix, XenSource was widely regarded as the one of the companies most likely to compete directly with VMware for the new high ground of the virtualisation software market.

The commercial offshoot of the Cambridge University-centred Xen open source hypervisor project is arguably the richest source of Intel x86-based hypervisor expertise outside of VMware. But, having come to market six years later than VMware, XenSource has still to register any significant commercial success, or to win wide support among enterprise customers.

As a unit of Citrix, a $1 billion company which supplies software to 98% of the Fortune 500, XenSource can expect dramatically improved access to potentially major accounts, and correspondingly much faster growth.

Indeed, although Citrix has revealed that XenSource is expected to contribute $1 million in revenue to its fiscal 2007 balance sheet, that figure is expected to reach $50 million in fiscal 2008. By 2009, said Wasson, XenSource is expected to be the nucleus of a Citrix virtual infrastructure business worth $200 million.

Further reading

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