Citrix Acquires XenSource for $500 million

For the past couple of weeks, I've been hearing rumors that Citrix would acquire XenSource. Thinking of Citrix's past history of acquisitions, the overall history of technology acquisitions and what I know about the personalities of the two companies in question, I told people that I thought this was a rather bad idea. I'm now reading the press release that indicates that Citrix as acquired XenSource for $500 million in stock and cash. If my calculator is somewhere near accurate, that's well over 100 times the projected revenues for XenSource this year. Here's a snapshot analysis of this move.

I'll update this document as I learn more from representatives of both Citrix and XenSource.

Snapshot Analysis

Here are some facts:

• Citrix is well known for access virtualization and much less known for its capabilities in application virtualization and application-layer clustering.
• Citrix is married to Microsoft and it's environments and has been only vaguely committed to supporting Unix and only mentioned Linux when pressed.
• XenSource is known for virtual machine software, virtual machine migration software and management software for virtualized environments.
• XenSource is married to the open source community but does have a relationship of sorts with Microsoft.
• The two companies have very different management styles and cultures
• The market for virtual machine software is highly competitive. Microsoft, VMware, Qumranet and several Linux distributors can all be seen as competitors.

Here are some quick thoughts about the acquisition:

• To compete with Microsoft and VMware, Citrix needed a better processing virtualization story and XenSource provides a really good set of capabilities in this area. From this vantage point, the acquisition makes some sense.
• Citrix has paid quite a bit for this company. It is not at all uncommon to see companies acquired for between 15 to 20 times the companies' revenues. If the projections I've seen of XenSource's revenues are anywhere near accurate, Citrix has paid well over 100 times XenSource's revenues. This may simply be too much.
  • Virtualized environments are clearly important to the industry today for many reasons.
  • Unless Citrix changes XenSource's pricing model, it will have trouble making this investment produce a positive return in a reasonable period of time.
  • Market dynamics and the fact that others, such as Red Hat, SUSE, etc., could easily pick up the open source version of this software to compete will make it difficult for the company to raise its fee structure.

• Historically, the attempts to meld technology companies having dissimilar management styles and cultures have not turned out very well. It doesn't take long to find disasters. Some examples are IBM's acquisition of Rholm or CA's acquisition of Ingres are really good reference points. In both cases, the key talent that made the companies what they were left quickly after their home was acquired. Both IBM and CA were left holding very expensive shells of what had been thriving, innovative companies. It's hard to imagine how Citrix will be able to meld an open source company into their heavily Microsoft-focused environment.

What's your view? Do you agree with my analysis that it would have been wise to start with a strategic partnership and seeing how things could be made to work would have been better than immediately rushing to the chapel and tying the knot?