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8/15/2007
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Citrix Buying XenSource To Tap Red-Hot Virtualization Market

Citrix has been trying to position itself as a virtualization player. The deal will give it credentials in the market.

Pouring more fuel on the sizzling virtualization market, Citrix said today it has signed an agreement to buy XenSource, the company that supplies the open source Xen hypervisor, for about $500 million in cash and stock.

The deal follows Tuesday's meteoric initial public offering for shares in VMware, the server virtualization market share leader. VMware shares were up more than 75% for the day. VMWare's virtualization software makes it possible to run multiple operating systems and multiple applications simultaneously on the same computer.

Citrix officials have been trying in recent months to be recognized as a desktop virtualization play based on its existing product line. Acquiring XenSource will give stronger virtualization software credentials for new products that manage user desktops as virtual machines instead of physical PCs.

But acquiring a supplier of open source code will require Citrix, a proprietary company, to walk a line of both supporting the open source initiative and fielding its own products. Reserving the best of new development for its own product line risks offending a community of supporters that have propelled Xen into a position of being one of the few strong challengers to VMware.

Citrix says the XenSource team and products will be the core of a new Virtualization & Management division within Citrix. XenSource CEO Peter Levine will lead that group and report to Citrix president and CEO Mark Templeton.

While VMware dominates the market for server virtualization, Citrix thinks most of the virtualization market is untapped today. "This move is not about competing for the 5% of the market that is already being served," Templeton said in a statement. "It's about steering into the 90% white space that is wide open, both at the server and in new emerging opportunities at the desktop."

VMware has gained market share by convincing IT managers they can consolidate many servers into one running several virtual machines. It's a story that's gained credibility in an environment where IT managers are looking to reduce electricity, hardware, and floor space consumption. Investors showed their faith Tuesday, driving share prices from the $29 offering price to $51 by market close, reaching as high as $54 in the day's trading. The offering by VMware's parent company, EMC Corp., raised $957 million in exchange 10% of the company.

Citrix, with its Presentation Server, creates virtual desktop applications on a central server, then allows hundreds or thousands of end users to access those applications on the server instead of at their own desktop.

Citrix also generates desktop applications on a central server and streams them down to end users, where they are run on end users' machines. Both techniques have advantages of centralized desktop administration, such as patching or upgrading the application, while maintaining the end user experience.

Citrix also supplies products that allow a blade server in the data center to be dedicated to an end user and function much the same as a powerful computer located in the user's office.

Adding XenSource to this lineup would give it the opportunity to expand its end user virtualization options and introduce new end user virtual machine management tools.

VMware's success and the XenSource acquisition are likely to spawn more activity in virtualization. "Desktop virtualization is an enormous market," says Foundation Capital venture partner Ashmeet Sidana. "It's much bigger than server virtualization." His firm is backing a startup, Panologic, in stealth mode that leverages desktop virtualization, and it's looking for other virtualization plays in which to invest. There are already startups trying to move on the desktop virtualization market, including Vizioncore and Kidaro. No one has emerged from the pack yet to do to desktops what VMware has done to servers.

There are companies other than VMware and XenSource in the market. Analysts at Credit Suisse in a report this week floated Virtual Iron and XenSource as companies that Citrix might want to buy. One of the fastest growing young companies is SWsoft, with its Virtuozzo software. SWsoft sales are growing at an annual rate of 127%, according to its first-half earnings report released Monday. Virtuozzo generates multiple virtual machines under one copy of an operating system, as does Sun Microsystems' Solaris 10 operating system. In effect, Virtuozzo and Solaris "containers" partition the hardware resources into virtual machines all managed by a single host. Both VMware's ESX Server and Xen, on the other hand, include a copy of an operating system in each virtual machine they create. There are advantages to each approach.

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