The day after the great VMware IPO Tuesday, supposedly the hottest thing since Google went public, Citrix, a Microsoft camp follower with the scars to prove it, said it's acquiring VMware's open source commercial competitor, XenSource Inc, the company that developed Xen's chi-chi hypervisor.

It's paying about $500 million in cash and stock (60-40), a pricey number not all that different from the $635 million that EMC paid for VMware early in '04. But considering it's for an open source start-up not yet three-years-old with 80 people and under $5 million in annual revenues, it's rich.

The price includes the assumption of about $107 million in unvested stock options to hold people and the deal will result in an $8 million-$10 million write-off for in-process R&D.

Obviously Citrix expects the merger to move it and its thin client-style software, which reflects applications running on the server onto the desktop - a specialty under pressure by virtualization - into the adjacent server and desktop virtualization game, calculated to grow to nearly $5 billion over the next four years, and put maybe 30 million office workers on virtual desktops in the next five years.

That being the case, Citrix expects XenSource to advance its own application delivery business by adding key enablers that push to virtualize the logic and data tiers of applications. It's promising to make the solutions cheaper and less complicated.

Citrix figures the acquisition strengthens its partnership with Microsoft. See, XenSource, which works on Windows, has access to Microsoft's hypervisor virtualization widgetry, code named Viridian and due out in 3Q08.

And Citrix did manage to wheedle a ra-ra quote from Microsoft senior VP, servers & tools Bob Muglia for its announcement. Maybe that means Microsoft will use some of Xen in Viridian or, according to The 451 Group's musings, maybe just up and buy Citrix.

The 451 folks figure Viridian becomes the "base operating system for its next business," as it borrowed from Microsoft to start its original business, and "save a couple of years development time by buying XenSource to get into the virtualization market."

The acquisition of XenSource and its 650 customers, a number that reportedly doubled in the last 90 days, is supposed to close in Q4. Citrix then intends to create a Virtualization & Management Division to house it led by XenSource CEO Peter Levine. He will report to Citrix president and CEO Mark Templeton.

In a canned quote, Levine said, "This move is not about competing for the 5% of the market that is already being served. It's about steering into the 90% white space that is wide open, both at the server and in the new emerging opportunities at the desktop."

The shiny new rev of XenSource's version of Xen, XenEnterprise 4, due to ship on August 20, adds mobility, monitoring and storage integration and 64-bit support good for SQL and Exchange 2007. It can now handle physical systems with 128GB of memory and offer guest operating systems 32GB of space, accommodating a physical CPU limit of an eight-way server, better than what VMware can manage.

When the new cut was announced Monday, XenSource was already thinking about melding it with Citrix' Desktop Server and about helping Citrix Desktop Server deliver desktops from the data center as a secure on-demand service.

Citrix intends to push XenSource through its 5,000 channel partners and leverage its relationships with server and data center infrastructure folks, like Symantec with its Veritas storage interests, to create additional routes to market through OEM sales channels.

Citrix says it will continue to contribute to the Xen open source project that's led by XenSource co-founder Ian Pratt but between now and when the deal closes, they're going to try to develop procedures for independent oversight of the project. Both Novell and Red Hat include Xen.

Citrix said the acquisition will add $1 million in revenue and roughly $3 million in cost revenue and operating expenses to its 2007 fiscal year and $50 million in revenue and $60 million-$70 million in total cost of revenues and operating expense to its 2008 fiscal year.

XenSource was backed to the tune of $41.5 million by Sevin Rosen, Ignition Partners, New Enterprise Associates, Accel Partners and Kleiner Perkins, a prestige lot.

VMware has been awarded 85% of the market and then there's Virtual Iron.

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