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Citrix Joins VMware Rivalry

Ivy Lessner

SAN FRANCISCO -- Citrix Systems(CTXS - Cramer's Take - Stockpickr) declared itself a direct competitor to IPO hotshot VMware(VMW - Cramer's Take - Stockpickr) with its acquisition Wednesday of privately held virtualization developer XenSource.

The $500 million deal -- 60% stock and 40% cash -- gives Citrix a strong virtualization software maker that complements its own virtualization capability for application software.

Citrix is assuming $107 million in unvested XenSource stock options, "which we believe will help with employee retention," Citrix CFO David Henshall said in a conference call.

It also allows Fort Lauderdale, Fla.-based Citrix to grab a piece of the market for virtualization as it grows from an estimated $5.5 billion today to $11.7 billion in 2011, according to figures from IDC.

VMware, which debuted on the NYSE Tuesday , closed the regular session at $51, or 75.9% above its $29 offering price. The stock was up $7.35, or 14.4%, to $58.35 late Wednesday.

Palo Alto, Calif.-based XenSource will become Citrix's new Virtualization and Management Division, said Citrix CEO Mark Templeton.

FBR analyst Daniel Ives said in a research note that investors would consider the timing and price tag of the deal a tough pill to swallow for now, "although we agree with the long-term potential growth of the datacenter/desktop virtualization market."

Paying roughly 10 times anticipated 2008 revenue "for a dilutive acquisition is a high price" and will put pressure on Citrix's operating margins, Ives said.

The stock was up 44 cents, or 1.3%, to $33.20 late Wednesday.

The deal is expected to close in late 2007. Citrix expects XenSource to add $50 million in revenue and $60 million to $70 million in expenses for fiscal 2008.

XenSource has approximately 650 customers, and the company is doubling new-customer acquisition quarter on quarter, the company's CEO, Peter Levine, said in the call.

"We view the XenSource acquisition both as an offensive and defensive move," said Ives whose company makes a market in Citrix stock. Citrix is making a move into virtualization to strengthen its "footprint, while defending against longer-term competitors, such as VMware," he added.

Citrix fills some "glaring holes" in its product line with a hot property: XenSource's "exclusive access" to Microsoft's(MSFT - Cramer's Take - Stockpickr) coding for its upcoming Viridian hypervisor -- "a key driver for this deal," according to The 451 Group.

A hypervisor is the basic virtualization software layer; Citrix can add its own software on top and sell an integrated product comparable to VMware's.

Both Citrix and XenSource are partners of Microsoft, and the companies said they expect the deal to strengthen those relationships.

451 Group's analysts suggested that the acquisition may open the bidding for Citrix. If Microsoft were to acquire the company, the Redmond, Wash., software giant could fuse its own "server consolidation story into a credible 'virtualization desktop utility' stack, and -- not least -- gets its hands on the lucrative $1 billion enterprise Windows revenue now generated" by Citrix's Presentation Server, 451 Group wrote in a report.