That 'Microsoft buying Citrix' rumor pops up again…

With VMworld, the world's largest virtualization gathering, about to start next week, it was probably only natural that rumors of a major M&A in this hot space would bubble up to the surface.

Former Citrix engineer Douglas Brown blogged Friday his opinion that Microsoft Corp. might announce a purchase of Citrix Systems Inc. today or Monday to take the wind out of rival VMware Inc.'s sails.

Besides citing veteran tech pundit John Dvorak, who talked about it on his podcast, Brown sets out his logic, which goes something like this:

- Citrix dumped all of its distributors but one

- It's stopped spending on advertising and marketing

- It's stopped hiring and laid some people off

- Microsoft has lots of cash and will use it to win against VMware - Microsoft loves products like Citrix's XenDesktop

- Microsoft needs Citrix to compete against VMware

- HP, IBM and Cisco might buy Citrix, which Microsoft can't allow to happen

As a former insider, Brown is certainly privy to certain information (such as his first three reasons) that I'm not.

Citrix did not reply to a request for comment. Microsoft's no-comment comment? "Microsoft and Citrix have been partners for 18 years and the partnership has proven to be valuable to us, customers and the channel. We won't comment on rumors or speculation," wrote Patrick O’Rourke, group product manager for core infrastructure marketing in Microsoft's server & tools business.

So two non-denials. In other contexts, I might consider these tantamount to confirmations. But guided by analysts, my colleagues and my own research, I'm not convinced any Microsoft-Citrix acquisition is imminent. Why?

First, this rumor is OLD. It popped up last year after Citrix bought XenSource. But it has actually been percolating since the mid-1990s, according to Brian Madden, an independent virtualization analyst, and stem from the two vendors' tight, love-hate relationship.

Citrix's remote access and terminal server software have always been built upon operating system source code licensed from Microsoft, starting with the OS/2 code licensed for Citrix's early WinView app and running through today, with Citrix's licensing of Windows Server 2008.

Citrix is so dependent upon Microsoft that its future looked in doubt when Microsoft announced plans in 1997 to build it's own Windows remote access product, and presumably, let its license agreements with Citrix expire.

Its CEO camped out for nearly 3 months in Redmond; his effort resulted in a cross-licensing agreement, by which Citrix kept getting access to Windows while Microsoft got access to Citrix's remote access IP. But those agreements have been tricky enough that it was assumed that Microsoft would simply take over Citrix at some point.

Actually, and here's the second point, Microsoft had a stake in Citrix going way back. Between 1991 and 1995, Microsoft put in a total of $2.4 million in Citrix, taking 6% to 7% of the company.

It's unclear to me if Microsoft still has a stake in Citrix. I didn't hear back from Citrix's investor relations, nor Microsoft's PR. Anyone have an idea? Still, I think that relationship, whether it exists today, is one reason the rumor persists.

Third, "why buy the cow when the milk is free?" asks Madden, who points out that every time someone buys Citrix's XenApp product, they have to buy Terminal Server access licenses from Microsoft. According to Madden, Microsoft makes more than $500 million a year today from Microsoft licenses sold by Citrix.

"Everytime Citrix wins, Microsoft wins," he said.

Fourth, Microsoft may have a lot of cash, but Citrix won't come cheap. Its market cap is $5.3 billion.

And what would Microsoft get? Not much it doesn't already own, Madden says.

"Hyper-V is going to be good enough for Microsoft to get 30-40% market share in a few years," he said. In management tools, "Microsoft has System Center and Virtual Machine Manager. And in the application virtualization space, Microsoft doesn't need Citrix's XenApp, it's got App-V. So there's no logical reason for Microsoft to buy Citrix, unless it's purely a defensive move."

Actually, Microsoft would get something it doesn't have (or want): the Linux-based XenServer product.

"Microsoft is not going to support XenServer," VMware consultant Edward Haletky told my colleague Pat Thibodeau.

Finally, the collective wisdom of the (investor) crowd doesn't buy it. As my editor, Marian Prokop, pointed out, Citrix's stock didn't budge at all today. And volume, a reliable indicator of speculative activity, was actually down.

Update: Brian Madden notes in his blog that Dvorak may have gotten his info from an undated Sys-Con article that Google News popped up as new late last week even though it appears to have been written earlier this year.

-----------

What do you think? Any more credence to the Microsoft-Citrix rumors this time around?