Citrix Systems Maybe Unable To Challenge VMware (CTXS, EMC, VMW, SYMC, MSFT, ORCL)

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This would have been a great story to cover any normal day, but if you have been following the trading sessions in the stock market you know times aren’t normal.  Citrix Systems (NASDAQ:CTXS) made an acquisition in the virtualization space by acquiring XenSource for for approximately $500 million in a combination of cash and stock, which includes the assumption of approximately $107 million in unvested stock options.  Citrix expects the virtualization of desktops and servers to reach $5 Billion over 4 years, and other. 

EMC Corp. (NYSE:EMC) made its buyout of VMware (NYSE:VMW), which was the huge IPO Tuesday, for some $635 million in a deal that was completed in early 2004.  The value of VMware and the market penetration is far better, and right now it seems that the market is treating the XenSource buy as a ‘me-too’ acquisition trying to catch a fad (although virtualization won’t be a fad).  With Microsoft (NASDAQ:MSFT) coming out with its own virtualization soon and with another competitor named Virtual Iron and others out there it seems like the space may get treated as crowded before it gets to even go mainstream.  We gave in our special situation investor newsletter subscriber service (sample now unembargoed) our playbook for capturing the downside in EMC right for after the IPO and that now seems to have mostly played itself out.

XenSource was VC-backed with a total of $41.5 million raised.  Virtual Iron was VC-backed, but also had Goldman Sachs (NYSE:GS) and Intel (NASDAQ:INTC) as investors.  VMware announced that Intel (NASDAQ:INTC) and later Cisco Systems (NASDAQ:CSCO) had each taken stakes before the IPO, but those were much larger investments with Intel putting in more than $200 million.  VirtualIron’s investment in 2005 was led by Intel with a whole group placing $8.5 million and an option for $2 million more with a strategic go-to-market partner. 

The industry pricing is roughly equal to the capital raised with VM’s Virtual Infrastructure running over $5,000 (and on up and up more) and XenSource running under half that for starters and then with VirtualIron running less than half again.  Being a lower cost provider works if you can out sell and out-partner a competitor, but only if you have more realistic goals and expectations.  Beating EMC at this is going to be more than tough even at its competitive pricing.

Symantec (NASDAQ:SYMC) also owns Altiris, which is also a virtualization package.  Intel has also dabbled in another virtualization player called SWsoft in 2005 and Intel also invested in VirtualLogix in the same space this June.  Oracle (NASDAQ:ORCL) seems like it is not in the fray here, so it might not be a shock to see them either make investments in these companies or buy one to see what it can do so it doesn’t cost billions in a few years.

You would think with the VMware IPO success that Citrix Systems would be viewed better, but maybe they are paying too much for too little and too late.  Even at the end of the day when the market went from -300 to positive before a slight down close, Citrix shares still closed on the downside by about 1.5% at $31.79.  It closed down roughly 1.5% on Wednesday as well, and that was the day the deal was announced.  Its 52-week trading range is $26.10 to $39.77, and looking at the trading shows a chart that seemingly wants to act a weaker than the market regardless of direction. 

Jon Ogg is a partner in 24/7 Wall St.; he is the publisher of the 24/7 Wall St. Special Situation Investing Newsletter and does not own securities in the companies he covers.