Good Morning Silicon Valley

The tech news word of the day is “virtualization,” but there’s nothing virtual about the big bucks that are changing hands. After introducing their stock to Wall Street yesterday, the folks at VMware, market leader in the software that allows one machine to run multiple operating systems, found themselves running a $19 billion company. The stock ended its first day up more than 70 percent, making it Silicon Valley’s third-largest home-grown software company after Oracle and Adobe Systems.

But there was little time to celebrate, as hours later, a new competitor emerged. Citrix Systems, a leader in application delivery infrastructure, shelled out $500 million for Palo Alto’s XenSource, an open-source server virtualization outfit. According to the press release, “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.”

Virtualization has always had great appeal for businesses because it can cut costs and simplify network administration, but only in recent years has the estimate of the market reached a size big enough to attract serious money. Says Gordon Haff at Illuminata Perspectives, “The market, and companies like Citrix, are now valuing virtualization capabilities and prospects at something like 10x that they were a few years ago.” And the Citrix deal is also being seen as a validation of open-source companies as takeover targets. But neither VMware nor Citrix has any time to waste. In a feeding frenzy like this, it’s only a matter of time before the big shark from Redmond shows up, and Microsoft has a virtualization product called Viridian in the works. That could make things a little awkward for Citrix and XenSource, both Microsoft partners. As research outfit the 451 Group told its clients, “The virtualization market now revolves around three players: market darling VMware; Citrix’s combination of young blood and old money; and the (potential) threat of Microsoft’s Viridian, slated to ship in Q3 2008. Both Citrix and VMware have a 12-month window of opportunity before Microsoft shows its full hand.”