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Rumours heating up that Citrix may snap up XenSource

On the heels of Tuesday's successful VMware IPO, rumours are again circulating that Citrix and XenSource may be hatching an acquisition deal just as the server and desktop virtualization markets are red hot.

Investment banking firm Jefferies & Company issued a report Tuesday on Citrix entitled Citrix-Xen Makes Perfect Strategic Sense.

The company says Citrix's close relationship with Microsoft - the two have worked together for years on thin-cleint technology - is key in that Citrix could help Microsoft make up ground on VMware, whose successful IPO on Tuesday confirmed its leadership role in the emerging virtualization market.

Jefferies pegged $400 million as a projected price Citrix would pay for XenSource.

Neither XenSource or Citrix had any comment on the rumours.

Jefferies noted Microsoft's struggles to release software to competently compete with VMware's ESX platform.

The software Microsoft is struggling with - Windows Server Virtualization (WSV), an add-on for Windows Server 2008 - is slated to ship mid-2008 even though Jefferies incorrectly reported the dates.

The report says the relationship Citrix and Microsoft crafted in the 1990s around Citrix's MetaFrame thin-client technology provided Citrix an insiders view of Microsoft's roadmap and allowed Citrix to focus on building enhancements and improvement to the overall platform.

Jefferies said that scenario could play out again if Citrix acquired XenSource and provided Microsoft with technology it could use to battle VMware as WSV remains in development. Citrix could then focus its efforts around the desktop and management tools.

Observers say it is a logical strategy given the fact that Microsoft faces an uphill battle in proving it can deliver reliability in its Windows-based virtualization platform where system restarts of servers hosting multiple virtual machines can prove costly.

XenSource, which is carving out a niche with its open-source Xen hypervisor engine among Linux vendors, namely Red Hat and Novell, could fill the gap if WSV stumbles out of the gate next year.

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Microsoft has already pulled some features in order to keep WSV's ship date on track.

XenSource also develops management tools for monitoring collections of virtual servers, while Microsoft's forthcoming Virtual Machine Manager will not support WSV in the first release.

And Windows users are not strangers to the Xen-based virtualization environment.

Last week at the LinuxWorld Conference, Simon Crosby, XenSource CTO, said 90% of the company's customers for its open source Xen hypervisor are Windows-only.

He also described the Xen hypervisor as just an engine that requires others to build parts around it just as XenSource has done with its commercial XenServer and XenEnterprise software.

"Xen is likely to fulfill a similar role as Meta Frame in its early days, providing Microsoft with an immediate solution, but one where [Citrix] can stay heavily involved in product development and benefit directly from sales of Windows on Xen, while [WSV] development progresses," Jefferies analysts Katherine Egbert, Jordan Roberts and Eric Bukovinsky wrote in their report.

Jefferies is not alone in its assessment as last week Credit Suisse also theorized on a Citrix acquisition of virtualization technology with an eye on the desktop.

The company cited recent public comments by Citrix "that virtualization and systems management are areas of potential interest for acquisition."

The Credit Suisse report said one of the developers of commercial virtualization platforms based on open-source Xen (XenSource or Virtual Iron) "could represent an attractive target for Citrix."

The report cites the fact that Citrix already has two of the three components to support virtual desktops. The two are its virtualization technologies for the presentation and application layers of the desktop. The third, a hypervisor and virtual infrastructure management tools, is only provided via partnerships.

"We believe that hypervisor and associated management solutions would be complementary to Citrix's long-term strategy of offering scalable application and desktop delivery," the report concluded.