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Citrix swallows XenSource

Citrix Systems, Inc. today announced that it will acquire XenSource, Inc., for $500 million – a move that will catapult the company into the server and desktop virtualization market.

The Fort Lauderdale, Fla., company said the purchase will be a combination of cash and stock, which includes the assumption of $107 million in unvested stock options. The deal should be finalized in the fourth quarter of 2007.

In a conference call with analysts this morning, Mark Templeton, Citrix president and CEO said Citrix infrastructure combined with Windows applications are delivered to almost 70 million people in over 100 countries and the company’s products power over 600,000 x86 servers in data centers around the world. The company is banking on its current customer base and its 5,000 channel partners to accelerate XenSource’s adoption.

“We’ve been a leader in virtualizing the user tier of applications for many years with our Presentation Server product family. This acquisition allows us to expand the use of virtualization into the logic and data tier of applications and into the newly emerging markets for desktop delivery,” Templeton said. “This clearly positions us as the only vendor providing solutions for applications, desktop and server virtualization, giving Citrix the broadest portfolio of virtual infrastructure technologies in the world,” Templeton added.

Templeton also stressed Citrix’s support for the Xen open source community.

“It’s important to many of the industries largest and most innovative contributing companies including Citrix partners such as Intel, IBM, HP and AMD. We share the XenSource vision of a ubiquitous open source industry standard for virtualization,” Templeton said.

The announcement comes one day after XenSource’s rival VMware successfully debut on the New York Stock Exchange posting a 76% gain on its first day of trading.

While VMware is the overwhelming leader in virtualization software, XenSource’s recent release of its XenEnterprise version 4 showed significant gains in ease of use, scalability and high performance for Windows and Linux virtual machines. That has many observers noting that XenSource is closing the gap as it competes with VMware’s virtualization software.

According to Peter Levine, XenSource’s CEO, the acquisition will mean XenSource will be wholly focused on the delivery of easy-to-use affordable high performance virtualization solutions for the enterprise server and data center markets. “We will continue to aim to offer our customers the most compelling products for server consolidation, development and test automation, high availability, disaster recovery and automated software provisioning,” Levine said.

Citrix also announced that once the deal is finalized a new Virtualization and Management Division of Citrix will be formed and will be led by Levine who will report directly to Templeton.

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What does this mean for Amazon's EC2 which is built around Xen? Probably nothing, but there are interesting stirrings around virtualization, data centers, SaaS, Web 2.0, and plays like Amazon's Web Services (which MSFT, GOOG, and others are emulating):