Citrix (CTXS) wants some of VMware's (VMW) billions

With a market cap of $20+ billion, VMware (NYSE: VMW) has certainly caught the attention of the software world. The company is the dominant player in virtualization, which is a "must have" for a growing number of organizations. Basically, it allows much improved utilization -- and cost savings -- from servers.

Well, Citrix (NASDAQ: CTXS) is one of the first to make a bigger splash into the virtualization space. That is, yesterday the company announced that it will shell out a cool $500 million for XenSource.

No doubt, it was smart for the folks at XenSource to wait for the Vmware debut. I'm sure it added some points to the valuation. In fact, it looks like XenSource is posting about $3 million in revenues this year -- but that should be ramped quickly with Citrix's distribution platform.

XenSource is building sophisticated tools for Microsoft's (NASDAQ: MSFT) push into virtualization, which is supposed to hit the markets in late 2008 (but Mr. Softie always seems to miss release dates).

Keep in mind that Citrix has built a growing, profitable business by pigging-backing on Microsoft systems (and has had an extensive relationship with the software powerhouse for more than ten years).

In other words, it's still early in the game. But with billions and billions at stake, it looks like Citrix will make virtualization a critical priority -- and we'll likely see more and more competition for VMware.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.