Citrix has agreed to acquire XenSource for $500m in cash and company stock.
Rumours about a potential acquisition of the virtualisation vendor had been floating around for several days.
The virtualisation market is considered red hot after VMware launched an initial public offering on the New York Stock Exchange on 13 August.
XenSource offers a commercial implementation of the Xen open source virtualisation technology, but its software is considered less mature than VMware's.
XenSource aims its product at the low end of the virtualisation market, focusing on Windows users. It is positioned between the enterprise grade VMware ESX Server and free virtualisation software from vendors such as VMware and Microsoft.
The company launched its XenEnterprise v4 software on13 August, which the firm claims offers an enterprise class alternative to VMware ESX Server.
The acquisition offers a challenge to VMware's market dominance, according to Gordon Haff, a senior analyst with Illuminata.
"VMware has established such a dominant market position in this space, that it was not clear how XenSource was going to make money in the long haul," Haff wrote in a news analysis.
The analyst added that core virtualisation technology is likely to become a commodity. Under the Citrix umbrella, XenSource will have a better opportunity to sell products that leverage virtualisation technologies.
Citrix develops software that delivers applications over a network to thin clients, providing remote access to legacy software and allowing applications to be used by multiple users.
The XenSource acquisition allows Citrix to expand beyond its current niche market. Although its software essentially offers virtualisation functionality, it is not viewed as such.
"XenSource brings Citrix some legitimate expertise and products that it can bring to bear on the popular virtual machine-style of virtualisation," said Haff.
"But the XenSource name also brings with it some legitimate street cred in the virtual machine space. And that is worth some serious bucks all by itself."
XenSource will operate as a new Virtualisation & Management division within Citrix.
