Citrix Systems on Wednesday said it had agreed to acquire XenSource, a maker of virtualization software, for $500 million in cash and shares.

The deal was announced one day after shares of virtualization software leader VMware shot up 76 percent on their first day of trading (see VMware Blasts Off).

Fort Lauderdale, Florida-based Citrix makes corporate software that creates virtual desktop applications on a central server so that users can access the applications remotely.

The XenSource acquisition will expand Citrix's reach into the market for server virtualization software, used to harness unused computing power by enabling servers to run multiple applications or operating systems from a single unit.

Proponents of virtualzation say customers can yield a return on their investment in three to six months through lower power costs.

The deal is expected to close in the fourth quarter of 2007 subject to shareholder approval.

Palo Alto, California-based Xensource has raised $38 million in venture capital from investors Kleiner Perkins Caufield & Byers, Accel Partners, Ignition Partners, New Enterprise Associates, and Sevin Rosen Funds.

The successful IPO of competitor VMware could have jacked up XenSource’s valuation despite having a little more than just $1 million in annual sales, a report from research firm AMR Research said.

Citrix expects to yield about $50 million in revenue from XenSource next year.

The virtualization craze is good news for Lowell, Massachusetts-based Virtual Iron, a four-year old startup that competes with VMware and XenSource.

“We are more bullish today than we have ever been,” said Virtual Iron CEO John Thibault. “I think this is nothing but an absolute spotlight on the server virtualization market.”

Virtual Iron has more than 750 customers and is doubling revenues every quarter, Mr. Thibault said. The server virtualization market is expected to reach $12 billion in the next five years, according to research firm IDC and, so far, only 5 percent of the market has been tapped.

This presents a tremendous opportunity for Virtual Iron and its competitors. The positive response of the VMware IPO is pushing Virtual Iron toward a possible public offering in 2009, he said.

Virtual Iron is funded by Highland Capital Partners, Matrix Partners, Goldman Sachs, Intel Capital, and SAP Ventures.