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Citrix Buying VMware Rival for $500M

Citrix Systems is buying XenSource Inc. for $500 million, marking the second big deal this week in thte virtualization segment.

Citrix Systems Inc. is buying 3-year-old startup XenSource Inc. for $500 million, marking the second big deal this week to highlight the bustling market for software that makes computers run more efficiently.

The cash-and-stock acquisition announced Wednesday followed the sensational stock market debut of XenSource's much-larger rival, VMware Inc., whose shares have nearly doubled from Monday's initial public offering price of $29.

VMware shares climbed $6.71 to $57.71 during Wednesday trading, leaving the previously little-known company with a market value of about $22 billion. Only four other publicly traded software companies -- Microsoft Corp., Oracle Corp., SAP AG and Adobe Systems Inc. -- are currently worth more.

Like VMware, XenSource is based in Palo Alto and specializes in "virtualization." The term refers to software that helps computers harness more of their unused processing power and unleashes applications from a single machine in a data center.

XenSource's assets include a 2006 agreement giving it access to the code that Microsoft has been working on for its own push into the virtualization sector. That product, code named "Viridian," is expected to be unveiled next year.

Citrix has been working closely with Microsoft for years, prompting an industry research firm, The 451 Group, to speculate that Wednesday's deal could lay the groundwork for Microsoft to eventually buy Citrix.

The 451 Group also listed Hewlett-Packard Co. and Cisco Systems Inc. among Citrix's other possible suitors. San Jose-based Cisco is among VMware's largest shareholders after agreeing to buy 6 million shares of its stock for $150 million.

Although VMware is on a pace to surpass $1 billion in revenue this year, privately held XenSource is just getting going with about 80 employees and annual revenue of less than $5 million. Next year, Ft. Lauderdale, Fla.-based Citrix expects XenSource to generate about $50 million in sales.

Based on that projection, Citrix appears to be paying a steep price for XenSource, said Friedman, Billings, Ramsey & Co. analyst Daniel Ives.

"We believe the timing and price tag of this acquisition could be a tough pill for investors to swallow near term," Ives wrote in a research note Wednesday.

Citrix shares fell 49 cents to $32.27 in trading Wednesday.

The sale, expected to be completed in the fourth quarter, represents a jackpot for the venture capitalists who invested about $40 million in XenSource. The venture capital firms backing the company include Sevin Rosen Funds, New Enterprise Associates, Accel Partners and Kleiner Perkins Caufield & Byers.

Citrix specializes in making applications run remotely so they can be accessed more easily and less expensively in corporate call centers and other offices. With $642 million in revenue through the first half of this year, Citrix is slightly larger than VMware, which had sales of $555.5 million during the same period.

But VMware is growing far faster and loom as a major threat to Citrix as it expands beyond corporate data centers and tries to sell more virtualization software for personal computers in offices.

Analysts for The 451 Group said Citrix also mulled a possible bid for another virtualization specialist, Virtual Iron Software Inc., before buying XenSource.

John Thibault, Virtual Iron's chief executive, declined to comment Wednesday when asked whether Citrix approached him. But he acknowledged Lowell, Mass.-based Virtual Iron is bound to attract more attention now that VMware has cast a spotlight on the virtualization field.

"It's been a very good thing for the marketplace and for us," Thibault said. "This is a very strategic market for some very big companies in the (high-tech) space."

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