Citrix has confirmed that it's buying open source virtualisation vendor XenSource at a cost of $500 million.

It puts Citrix into direct competition with VMware, whose recent IPO and share price soar confirmed it as the darling of the virtualisation industry, with over 85 percent market share.

The company said: "This will allow Citrix to extend its leadership in the broader application delivery infrastructure market by adding key enabling technologies that make the end-to-end computing environment far more flexible, dynamic and responsive to business change. The acquisition will also strengthen each company’s strong partnership with Microsoft and commitment to the Windows platform. The acquisition is expected to close in the fourth quarter of 2007 subject to the satisfaction of closing conditions."

The acquisition follows hard on the heels of XenSource's announcement of XenEnterprise 4, XenSource's flagship product, which it sees as "a significant milestone in [its] transition from a next-generation technology company into a leading provider of comprehensive enterprise-class virtual infrastructure solutions."

Prior to the move, Citrix was egged on by financial analysts at Credit Suisse. "In our opinion, one of the Xen developers—either XenSource or Virtual Iron—could represent an attractive target for Citrix, as we believe that hypervisor and associated management solutions would be complementary to Citrix’s long-term vision of offering scalable application and desktop delivery," wrote Credit Suisse's Philip Winslow and Dennis Simson. "We believe that hypervisor and associated management solutions would be complementary to Citrix’s long-term strategy of offering scalable application and desktop delivery."

Since the announcement, Citrix' share price, which reacted positively at first, has fallen again, suggesting that investor and financial analysts have mixed feelings about the move. It could in part be because desktop virtualisation is a competitor to Citrix technology, which delivers desktops to thin clients via Windows Terminal Services, so, if Citrix goes ahead with the acquisition, this acquisition could undermine its core intellectual property in the long run.

“Today is a great day for the virtualization market because customers will now have a strong alternative that is open, proven and backed by one of the most successful end-to-end software infrastructure leaders in the entire industry,” said Peter Levine, CEO of XenSource. “This move is not about competing for the five percent of the market that is already being served. It’s about steering into the 90 percent white space that is wide open, both at the server and in new emerging opportunities at the desktop.”
“The combination of Citrix and XenSource brings together both presentation and server virtualisation to deliver more choice and flexibility to the market, particularly Citrix's strong installed base,” said IDC analyst John Humphreys. “By adding mobility, monitoring and storage integration in the recently introduced XenEnterprise v4, XenSource has narrowed the capability gap and delivered a viable virtualisation solution for server consolidation.”

Serguei Beloussov, chairman and CEO of competing virtualisation vendor SWsoft, said: "Why would Citrix do that? I'm surprised as it puts Citrix in competition with companies they don't want to be in competition with such as Microsoft. If it's true, it's not adding value to Microsoft, it's become a platform company. If anyone had bought XenSource, I would have expected to be HP or IBM."

The background to the move is the recent increase in the use of virtualisation technology to provide a similar benefit to Windows Terminal Services, but without the loss of performance and end user control that Citrix technology entails.

So Citrix grabbing XenSource could make sense from the company's point of view, not just because of the technology but also because Citrix is a close, long-time partner of Microsoft, which also has a controversial technology partnership with XenSource.

It would also mean that virtualising Citrix servers, which allows IT managers to consolidate them and whose benefits virtualisation software vendor SWsoft has in particular been keen to stress, will over time become easier and offer more performance than it does today. As Winslow and Simson point out: "Using a server virtualisation solution enables administrators to use larger servers as the infrastructure for a [Citrix] Presentation Server implementation."