Citrix Joins VMware Rivalry

SAN FRANCISCO -- Citrix Systems(CTXS Quote) declared itself a direct competitor to IPO hotshot VMware(VMW Quote) 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.