Citrix Systems plans to acquire virtualization vendor XenSource for approximately $500 million to enable the application delivery software vendor to enter both the server and desktop virtualization markets.

Citrix made the announcement on Wednesday, the day after XenSource's rival VMware launched an initial public offering.

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Virtualization, first used in mainframes, has become very popular in recent years as the technology's been applied to servers. Virtualization enables companies to cut down on the number of the computers they use by allowing each machine to function as a number of virtual machines running different operating systems.

Rumors had been circulating over the past few days that Citrix would buy XenSource, which both provides commercial and open-source flavors of its virtualization technologies.

Already, the boards of directors of both Citrix and XenSource have approved the deal. The purchase is subject to regulatory conditions and Citrix expects to close it in the middle of the fourth quarter of 2007, according to David Henshall, chief financial officer at Citrix.

The two companies have complementary product lines, Mark Templeton, president and CEO of Citrix, said during a morning conference call. "In short, XenSource and Citrix are a perfect fit," he added.

Citrix hopes to generate over $50 million in revenue through XenSource's virtualization products by 2008, he said, and then take a significant share of the overall virtualization market by 2011.

Both companies already have strong partnerships with Microsoft and intend to deepen those relationships once they become a combined entity. Citrix and Microsoft work together in the areas of Windows application delivery, application networking, and branch office infrastructure.

XenSource remains committed to ensuring interoperability between its own virtualization products and Microsoft's virtualization hypervisor, currently code-named "Viridian," according to XenSource CEO Peter Levine. Once Microsoft releases Viridian, XenSource will build dynamic virtualization services on top of the hypervisor in the same way that it's built its current offerings on the Xen hypervisor, he said. "We'll be able to offer a choice -- platform virtualization based on Xen or a solution based on Viridian," Levine added. "We fully expect to drive revenue out of both of those markets."

XenSource has already managed to balance working on open-source software and partnering with Microsoft by ensuring there's "a very clean separation" between the two efforts, Levine said.

Once the deal closes, XenSource employees and the company's products will form the basis of a new Citrix division focused on virtualization and management. Levine will head up the new unit and report directly to Templeton. The Xen open-source project will continue under its current project leader, Ian Pratt, who's also the co-founder of XenSource. Levine said that XenSource will work to develop procedures for independent oversight of the Xen project and bring in a third party to manage and take over some aspects of the project. "It also enables us to go and focus on building services that sit on top of XenSource and Viridian," he added.

XenSource currently has around 650 paying customers. Teaming up with Citrix and its 5,000-plus channel of partners "really lights up the availability of our product around the world," Levine said. In earlier creating a sales channel for XenSource, the company used Citrix's channel as its model, he added.

Over the last year or so XenSource has been busy ramping up the enterprise capabilities of its virtualization software, releasing XenEnterprise Version 4 on Monday. Citrix plans to distribute XenEnterprise through its channel partners and increase the number of OEM (original equipment manufacturer) deals for the technology. On the server side, Citrix will continue XenSource's support for storage management, building on its July OEM partnership with Symantec's Veritas storage business unit.

At the desktop level, Citrix intends to combine XenEnterprise v4 with its own Desktop Server as well as incorporating other pieces of its desktop software including EdgeSight monitoring, Access Gateway, WANScaler, GoToAssist and technologies it acquired from the purchase of Ardence, Templeton said.

While server virtualization, a market pioneered by VMware, is really taking off, desktop virtualization is still in its infancy.

"We're looking at the promise of a great marketplace," Templeton said, with plenty of work to be done on both the technology side and in raising customer awareness about desktop virtualization. "We'll drive it mainstream in a way that's only just begun," he added. "We're really at the front end of the opportunity."

Levine agreed. "We're looking to unlock virtualization for the volume market," he said.