Citrix Acquires XenSource

By Nicole Hemsoth

August 20, 2007

Citrix Systems Inc., the global leader in application delivery infrastructure, announced a definitive agreement to acquire XenSource Inc. of Palo Alto, Calif., a privately held leader in enterprise-grade virtual infrastructure solutions, for approximately $500 million in a combination of cash and stock, which includes the assumption of approximately $107 million in unvested stock options. This acquisition moves Citrix into adjacent server and desktop virtualization markets, expected by Citrix to grow to nearly $5 billion over the next four years. The combination of Citrix and XenSource brings together significant customer, technical, channel and go-to-market synergies. This will allow Citrix to extend its leadership in the broader Application Delivery Infrastructure market by adding key enabling technologies that make the end-to-end computing environment far more flexible, dynamic and responsive to business change. The acquisition will also strengthen each company’s strong partnership with Microsoft and commitment to the Windows platform.

The acquisition is expected to close in the fourth quarter of 2007 subject to the satisfaction of closing conditions.

Leveraging the Power of Xen

XenSource is the leading provider of enterprise-class virtual infrastructure solutions built on the open source Xen hypervisor. Originally created by the founders of XenSource at University of Cambridge, the Xen virtualization “engine” is now developed collaboratively by an active open source community of senior engineers at many of the industry’s most innovative infrastructure companies, including leading hardware vendors like Intel, IBM, HP and AMD. This open collaborative approach significantly accelerates the innovation of the Xen engine, leading to continual state-of-the-art improvements in performance, scalability and cross-platform support. The next-generation Xen architecture is widely acknowledged for its industry-leading performance, efficiency, security and native support for the latest hardware-assisted virtualization features from Intel, AMD and leading device vendors.

Today’s acquisition announcement comes on the heels of a substantial new release of XenEnterprise, the company’s flagship commercial product line powered by the Xen engine. XenEnterprise v4 marks a significant milestone in XenSource’s transition from a next-generation technology company into a leading provider of comprehensive enterprise-class virtual infrastructure solutions. With powerful new management, availability and ease-of-use features, XenEnterprise v4 raises the bar as the most open, scalable, high performance virtualization platform on the market. In a recent head-to-head product comparison published this week in CRN, the industry’s leading publication for channel resellers and integrators, reviewers praised XenEnterprise v4 as an “easy-to-use, feature rich offering that is quickly catching up to its main rival”. Channel partner and customer enthusiasm over the XenEnterprise product line has lead to a rapid increase in customer demand. Version 4 will further accelerate an installed base that has more than doubled in the last 90 days to over 650 customers.

“The combination of Citrix and XenSource brings together both presentation and server virtualization to deliver more choice and flexibility to the market, particularly Citrix’s strong installed base,” said John Humphreys, program vice president of Enterprise Virtualization for IDC. “By adding mobility, monitoring and storage integration in the recently introduced XenEnterprise v4, XenSource has narrowed the capability gap and delivered a viable virtualization solution for server consolidation.”

Upon close of the acquisition, the XenSource team and products will form the core of the new Virtualization & Management Division of Citrix dedicated to building and growing these important new businesses. Peter Levine, XenSource, CEO, will lead the new division, reporting directly to Mark Templeton, Citrix President and CEO. Under Peter’s leadership, Citrix is also committed to maintaining and growing its support for the Xen open source community, led by XenSource co-founder and Xen project leader, Ian Pratt. Between now and the close of the acquisition, XenSource will work with the key contributors to the Xen project to develop procedures for independent oversight of the project, ensuring that it continues to operate with full transparency, fairness and vendor neutrality — principles that are critical to the continued role of Xen as a freely available open source industry standard for virtualization.

“Today is a great day for the virtualization market because customers will now have a strong alternative that is open, proven and backed by one of the most successful end-to-end software infrastructure leaders in the entire industry,” said Peter Levine, CEO of XenSource. “This move is not about competing for the five percent of the market that is already being served. It’s about steering into the 90 percent white space that is wide open, both at the server and in new emerging opportunities at the desktop.”

“This announcement represents a key milestone for the Xen project,” said Ian Pratt, leader of the Xen project and co-founder of XenSource. “Citrix is committed to our community and the principles of transparency and neutrality that allow us to work together on the reference standard for virtualization, promoting the rapid, ubiquitous adoption of virtualization.”

Strong Alignment with Microsoft

The acquisition will also strengthen each company’s strong partnership with Microsoft and commitment to the Windows platform. As an independent company, XenSource has built a strategic relationship with Microsoft designed to ensure broad interoperability between XenSource products and the upcoming Microsoft Windows hypervisor, code named “Viridian”. This relationship complements and broadens the successful partnership between Citrix and Microsoft in the Windows application delivery, application networking and branch office infrastructure markets.

“Although the market is still in the earliest phase, virtualization already offers significant opportunities for cost savings and innovation,” said Bob Muglia, Senior Vice President, Microsoft Server & Tools Business. “Citrix and XenSource have long been strong partners for Microsoft and it is exciting to see them team up to help move the market forward.”

Extending Application Delivery Infrastructure from the Datacenter to the Desktop

Virtualization has become one of the most talked-about technologies in recent years because it breaks the “hard-coded” link between hardware and software, allowing individual computing components to be dynamically combined and reassembled for maximum efficiency and agility. Citrix has long been the leading provider of virtualization technologies at the user tier of computing with products that deliver mission-critical applications to end users with the best performance, security and cost savings. This acquisition will allow Citrix to extend its use of virtualization into the logic and data tier of applications, improving overall customer value and enhancing its position as a market leader in end-to-end application delivery infrastructure.

In the datacenter, this means extending virtualization to the servers that run the business logic of applications and the storage systems that manage application data. Citrix customers and partners are increasingly requesting non-proprietary, easy-to-use server virtualization solutions that are optimized to work best on the Microsoft Windows platform. Citrix currently intends to distribute the XenEnterprise product line through more than 5,000 channel partners with proven expertise in enterprise datacenter solutions built on the Windows Server platform. The company also plans to leverage its strong relationships with leading server and datacenter infrastructure partners to create additional routes to market through OEM sales channels.

In the storage market, Citrix will continue the XenSource strategy of leveraging key industry partners to ensure that the open-architecture XenEnterprise product line fully supports leading storage management and infrastructure solutions and a robust ecosystem of storage software vendors. The two companies share a strong belief that customers should be able to manage their virtual environments with the same proven storage management solutions they use for their physical environments. This strategy is exemplified by the recently announced partnership between Symantec and XenSource which ensures that XenEnterprise works transparently with Symantec’s Veritas Storage Foundation and Veritas NetBackup solutions.

“Symantec and XenSource share a common belief that customers want unified server and storage virtualization,” said Rob Soderbery, senior vice president, Data Center Management Group at Symantec. “Incorporation of Symantec’s Veritas Storage Foundation solution into XenSource open-architecture virtualization technology delivers that capability. We look forward to continuing our collaboration with Citrix and XenSource to help customers simplify data center operations and dramatically reduce costs.”

At the desktop, the combination of Citrix and XenSource will help make the emerging market for virtual desktop delivery a mainstream reality. Industry experts estimate that up to 30 million office workers will move to virtual desktops over the next five years, creating a new $1 billion market for desktop virtualization. While much of the underlying technology to realize this vision exists today, the available solutions are still far too complex and expensive for most customers to assemble, integrate and manage. By combining the capabilities of XenEnterprise v4 with the newly-released Citrix Desktop Server, Citrix will be able to provide customers with a comprehensive set of desktop delivery solutions that offer unparalleled economics, ease-of-use and end user experience. Citrix further intends to enhance this strategy by incorporating other relevant application delivery infrastructure technologies such as Citrix EdgeSight end user experience monitoring, Citrix Access Gateway for secure application access, Citrix WANScaler for accelerated delivery to branch office users, Citrix GoToAssist for remote desktop support and the OS-streaming and provisioning capabilities from its recent Ardence acquisition.

“We are tremendously excited about the opportunity to add the XenSource products, team and culture to the Citrix family,” said Mark Templeton, president and chief executive officer for Citrix. “Incorporating XenSource’s dynamic virtualization services into our market-leading application delivery infrastructure will enable our entire product line to be more flexible, agile and dynamic, qualities that have never been more important than they are today. We believe application delivery will be a defining issue for IT over the next decade because applications are the language of business. Companies that are fluent with application delivery will be the winners, while those who do not will lag behind, struggling with the pace of change in an increasingly dynamic world.”

Terms of the Agreement

Under terms of the definitive agreement, Citrix will acquire XenSource for approximately $500 million in a combination of cash and stock, which includes the assumption of approximately $107 million in unvested stock options.

The acquisition has been approved by the board of directors of each company and is expected to close during the fourth quarter of 2007. The acquisition is subject to various closing conditions, including regulatory review and approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, approval by the stockholders of XenSource, Citrix becoming current in its periodic reporting obligations and other customary conditions.

Assuming the transaction closes as expected, the acquisition is expected to add approximately $1 million in revenue and $3 million in cost of revenues and operating expenses to fiscal year 2007. The acquisition is expected to add approximately $50 million in revenue and $60 to $70 million in total cost of revenues and operating expenses to fiscal year 2008. The transaction will also result in approximately an $8 to $10 million non-cash expense charge for the write-off of in-process research and development in the quarter in which the acquisition closes.

These estimates of cost of revenues and operating expenses do not take into account any stock-based compensation expense, amortization expense, or other charges resulting from the closing of the acquisition.

About Citrix

Citrix Systems Inc. is the global leader and the most trusted name in application delivery infrastructure. More than 200,000 organizations worldwide rely on Citrix to deliver any application to users anywhere with the best performance, highest security and lowest cost. Citrix customers include 100 percent of the Fortune 100 companies and 98 percent of the Fortune Global 500, as well as hundreds of thousands of small businesses and prosumers. Citrix has approximately 6,200 channel and alliance partners in more than 100 countries. Annual revenue in 2006 was $1.1 billion.

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