Citrix Systems agreed to acquire XenSource today in a deal valued at US$500 million (AU$611 million).

The recently rumored deal will let Citrix enter the server and desktop virtualization markets, long dominated by VMware, who went public yesterday and whose shares are trading at US$51 at the close of trading.

Investment banking firm Jefferies & Company issued a report Tuesday on Citrix titled "Citrix-Xen Makes Perfect Strategic Sense." The company says Citrix's close relationship with Microsoft -- the two have worked together for years on thin-client 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.

XenSource commercialized the open source Xen virtualization hypervisor with its founding in December 2004. The company recently introduced a version of its software XenEnterprise that rivals VMware's Virtual Infrastructure 3 in functionality.

The acquisition will let Citrix deliver technologies that make the computing environment more flexible and dynamic to business change. It will also strengthen Citrix' position in the Microsoft Windows market.

"We will be building dynamic virtualization services and management tools on top of the Viridian base," says Peter Levine, CEO of XenSource. "You can think of Viridian as the open source proxy of the Xen hypervisor. When Viridian comes out we will build the same type of products we have done on the Xen hypervisor." XenSource has already hired a team based in Redmond, Washington, to work with Microsoft on Viridian.

XenSource will become part of the newly formed Virtualization & Management Division at Citrix. The company will continue to promote the Xen open source community, led by XenSource co-founder Ian Pratt.

Citrix will combine the capabilities of XenEnterprise with the Citrix Desktop Server. The company intends to also incorporate XenEnterprise capabilities with its Citrix EdgeSight monitoring software, Citrix Access Gateway security software and Citrix WANScaler application delivery platform. To enhance its virtualization capabilities, Citrix will also add XenEnterprise functionality to the operating streaming and provisioning capabilities from its recent acquisition of Ardence.

XenSource claims over 650 customers.

In 2008, Citrix expects XenSource to generate revenue of US$50 million. The deal is expected to close in the fourth quarter.