As VMware Goes Public, Citrix May Become A Competitor


UPDATE: CITRIX TO BUY XENSOURCE

Server virtualization software leader VMware debuted on the New York Stock Exchange on Tuesday amid a flurry of speculation that Citrix may acquire one of VMware's primary competitors, XenSource, which this week unveiled a new version of its software that brings it closer to VMware in terms of functionality.

Shares of VMware, in one of strongest IPOs in years, opened at $52 on the New York Stock Exchange on Tuesday, up 72 percent from its IPO price of $29.

But despite the strong opening, and the immediate jump to $55 after the market opened, the stock took its time to chart its course, falling to a low of $48 per share early in trading before gradually heading north to between $53 and $55 late in the trading day.

The opening price meant that VMware raised nearly $1 billion for its IPO, giving the company an assumed market capitalization of about $19 billion.

The market capitalization figure stems from the fact that storage giant EMC said in February that it will sell a 10-percent stake in VMware through an IPO in a move to help VMware employees realize more value from the company independent of what they receive as part of the overall EMC organization.

The VMware assumed market capitalization is nearly half that of VMware's parent company, EMC.

EMC acquired VMware in December of 2003 for $635 million.

Shares of EMC, which rose from about $13 per share in mid-March to open at $19.05 on Tuesday morning, fell to about $18.50 before recovering to about $18.75 at midday.

Reports of a potential acquisition of Palo Alto, Calif.-based XenSource stem from a report put out last Thursday by equity analyst Credit Suisse which said that Citrix may be interested in acquiring what it called "core virtualization infrastructure and management tools" to better address the next-generation data center.

NEXT: What puts XenSource in the runningCredit Suisse said that either XenSource or Virtual Iron, both of which develop server virtualization products based on Xen, would be an attractive target for Citrix.

"We believe that hypervisor and associated management solutions would be complementary to Citrix's long-term vision of offering scalable application and desktop delivery. While these companies' virtual infrastructure management tools are more immature versus more-established vendors, if Citrix can develop robust management software through increased R&D while leveraging the open source Xen hypervisor, Citrix could establish itself as a strong competitor in both desktop and server virtualization within two to three years," the report said.

Credit Suisse, in the report, also said that an acquisition of XenSource would help enhance Citrix's relationship with Microsoft, noting that Microsoft and XenSource announced an agreement in July of 2006 to collaboratively develop and deliver virtualization technology to increase the interoperability between Xen-enabled systems and the hypervisor technology-based Viridian, which is the code name for Windows Server Longhorn virtualization.

Ashmeet Sidana, venture partner at Foundation Capital, a Menlo Park, Calif.-based venture capital firm, which has a number of virtualization vendors in its portfolio, said VMware's IPO reaffirms that vendor's fundamental leadership in server virtualization and gives businesses the confidence in VMware to lay out their critical infrastructures.

The IPO will also span new uses for virtualization, particularly in the desktop space, said Sidana, who until three years ago was involved in product management for VMware's ESX Server product.

The expansion of virtualization into new areas including desktops is partly why a Citrix acquisition of XenSource makes sense, Sidana said.

"I believe virtualization will be even more disruptive on the desktop than in the server space," he said. "Virtualization in the desktop space gives the best of both worlds. It gives all the benefits of a personal computer with all the benefits of mainframe and thin client computing."

Sergius Heifa, president of Teklan, a Toronto-based integration and security solution provider and XenSource partner, said that an acquisition of XenSource by Citrix would be good for Citrix resellers, but not for XenSource partners.

"We selected XenSource because we were looking for faster and better technology," Heifa said. "We mix a lot of services with XenSource. Citrix is a commodity product. Its resellers beat each other up on price. If Citrix acquires XenSource, it would take an up-and-coming technology and make it just a part of its bag of technologies."

Francis Poeta, president and chief technical architect of PM Computers, a Cliffside Park, N.J.-based solution provider and partner of both VMware and XenSource, said the only real impact to the channel of VMware's IPO is the unlikely possibility that EMC might exert too much influence on VMware, something that it has not done so far.

"I like the fact that VMware will be independent," Poeta said. "It will have its own board."

The bigger question, Poeta said, is that as XenSource improves its virtualization technology, a move by customers to try it as an alternative to VMware could affect the latter's stock price.

"Before the IPO, VMware was buffered by EMC," he said. "But once it's a publicly-traded company, market volatility comes into play."

XenSource this week introduced a new version of its XenEnterprise that includes many functionalities that brings it closer to market-leading VMware.

The main new feature of XenEnterprise v4 is live migration of virtual servers with the XenMotion feature, said John Bara, vice president of marketing for XenSource. XenMotion allows users to move a running guest virtual machine to another host with virtually no service interruption, Bara said. "This takes us into high-end data center computing," he said.

XenEnterprise v4 also now includes Xen64, a 64-bit hypervisor with 64-bit and 32-bit guest support. "So when new versions of applications like Microsoft Exchange and SQL become available, this helps manage those applications," he said.

Also new is unified management through XenCenter, which uses a Windows-based graphical administration console to manage servers and storage in a virtualized environment, Bara said. The XenCenter GUI includes guided wizards, templates, and virtual machine import and export controls, he said.

XenSource is also offering APIs to allow other vendors to hook their applications into the XenSource software stack.

Sometime next quarter, XenSource will also embed Symantec's Veritas Storage Foundation software suite in its XenEnterprise, as previously reported.

XenSource goes to market completely through indirect sales channels, including 15 distributors and 300 solution providers worldwide, Bara said.

XenEnterprise v4 is expected to ship next week.

Poeta called the XenEnterprise v4 enhancements impressive, especially given that it only takes 10 minutes to install the entire application.

Despite the new advanced features, XenEnterprise is very suitable for the small and mid-size business space, as opposed to VMware, Poeta said. "SMBs are very price sensitive," he said.

Unlike VMware, XenEnterprise v4's XenMotion migrates virtual machines without the need of a SAN, Poeta said. "It's a paradigm shift," he said. "VMware's VMotion needs a SAN, so it's tough for SMBs who may not have a SAN."

Heifa said that XenEnterprise v4, with its live virtual server migration and its 64-bit capabilities, is the product the vendor's partners and customers have been waiting for. "So it's too early to sell out to Citrix," he said. "One dollar of attraction equals 10 dollars of equity."