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Citrix to Acquire XenSource

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With the VMware IPO still top of mind, Citrix Wednesday morning announced plans to acquire XenSource for approximately $500 million in a combination of cash and stock, along with assumption of approximately $107 million in unvested stock options.

The corporate entity may be set to be acquired, but its products and open source ideology will live on.

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The acquisition is expected to close next quarter.

At that time, the XenSource team and products will form the core of the new Virtualization & Management Division of Citrix. Current XenSource CEO Peter Levine will lead the new division, reporting directly to Mark Templeton, Citrix president and CEO.

This acquisition moves Citrix into server and desktop virtualization markets, and expands XenSource’s resources, reach and ecosystem. The acquisition is also expected strengthen each company’s strong partnership with Microsoft and commitment to the Windows platform, according to a statement released on Wednesday.

This announcements came two days after XenSource’s latest release of XenEnterprise.

XenSource is most often associated with its open source roots, but the hypervisor vendor also has strong ties to Microsoft — ties that the acquisition will strengthen for the new company. XenSource has built a strategic relationship with Microsoft designed to ensure broad interoperability between XenSource products and its not yet released Viridian hypervisor.

Citrix meanwhile, “is committed to furthering the open source hypervisor,” XenSource CTO Simon Crosby told ServerWatch. The statement noted that before the acquisition closes, XenSource will work with the key contributors to the Xen project, led by XenSource co-founder and Xen project leader Ian Pratt, “to develop procedures for independent oversight of the project, ensuring that it continues to operate with full transparency, fairness and vendor neutrality.”

Crosby said that the majority XenSource customers are using Windows, and despite what some claim, Citrix represents a “huge business opportunity for Microsoft.”

For Citrix, the acquisition expands the virtualization capabilities for its applications. The technology can be expanded into the logic and data tier of applications.

For XenSource, the acquisition adds resources, including cash and developers, and a ready-made ecosystem. Consider the boost to channel partners, alone: Last week, the XenSource had 300 value added resellers it reached via 15 distributors; post-acquisition, Citrix plans to distribute the XenEnterprise product line through its more than 5,000 channel partners.

XenSource has long held a different philosophy to virtualization than VMware, Crosby noted. Rather than building its own ecosystem of tools and ancillary products, XenSource has opted to partner.

Its commitment to this approach remains, as do some of the holes it is seeking to plug, dynamic resource scheduling for example.

In addition to relaying on partners to develop outside of its areas of expertise, XenSource believes, “virtualization is a consumable commodity that is part of a server stack — not a single product,” Crosby said, adding “It [XenSource’s strategy] is not about converting people from VMware. It’s about the servers not yet virtualized.”

A wise approach, given that even the most optimistic estimates peg virtual deployments in production at less than 10 percent of servers.

It would be naive to assume that the underlying reason for an acquisition does not boil down to future revenue. Citrix stated that assuming the transaction closes as expected, the acquisition is anticipated “to add approximately $1 million in revenue and $3 million in cost of revenues and operating expenses to fiscal year 2007. The acquisition is expected to add approximately $50 million in revenue and $60 to $70 million in total cost of revenues and operating expenses to fiscal year 2008.”

Approximately an $8 million to $10 million in noncash expenses are also expected to be written off and attributed to in-process research and development for the quarter in which the acquisition closes.

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