Quoting from The Register:

Citrix will announce its acquisition of XenSource tomorrow, The Register has learned.

In a bid to expand its software management play, Citrix will grab the developer of the open source Xen hypervisor. The deal will give XenSource heftier corporate backing needed to compete against VMware.

Read the whole article at source.

If confirmed this is the biggest announcement in virtualization industry so far for several reasons.

First of all hardware virtualization market is going to see three huge contenders: VMware, Microsoft and then Citrix. The acquisition is going to create even more competition between Microsoft and historical partner Citrix, despite existing deals between Redmond giant and XenSource.

Secondly it's a critical point to understand what will happen now of Xen as open source project, since most of its developers are XenSource employees. And most of all what will happen to Virtual Iron, which is basing its platform on Xen, and to Red Hat and Novel, which are embedding Xen in their distributions.

Virtual Iron may need to fork Xen to stay on business, while Novell and Red Hat may want to drop Xen support and turn to KVM, which is already integrated in Linux kernel.

This is probably the best moment for this acquisition: today's VMware IPO raised a new awareness around virtualization, XenSource is becoming highly competitive with new features introduced in just announced version 4.0, and Citrix alread owns other virtualization technologies: its own presentation virtualization, and application virtualization obtained with Ardence acquisition last year.

But most of all Citrix needed a new way to hold a strong market position: upcoming Windows Server 2008 will introduce enhancements to Terminal Services, making more difficult for a lot of companies additionally acquire Citrix technologies. Citrix is well aware of this and it's extending its offering to different segments since a while. Acquiring an hypervisor like XenSource would grant the company a remarkable positioning in the most profitable IT market at the moment.

Anyway Citrix would have to face open source community reactions to acquisition, which may consider Xen project destiny too uncertain to support it anymore, and turn to KVM all together.

In any case Qumranet, the company with develops KVM, will suddenly become the most interesting virtualization startup of the moment, and its first commercial product, expected for end of September, will be expected with much more interest.