VMware Inks Largest Acquisition with $1.26 Billion Nicira Buy

Virtualization giant VMware has agreed to purchase Nicira Inc., a provider of software defined networking (SDN) virtualization technology, for $1.26 billion -- the largest and perhaps most significant acquisition by VMware to date.

The deal could prove pivotal for VMware, which has made no secret of its plan to extend its core focus of server and storage virtualization to automating datacenters and cloud services including network resources.

Nicira, which released its flagship Network Virtualization Platform (NVP) last year, is regarded as a pioneer in bringing software-based network virtualization to market. Some of the largest cloud providers, carriers, government agencies and enterprises are have deployed NVP, including AT&T, eBay, Fidelity Investments, NTT and Rackspace Hosting. Nicira was founded in 2007 by Stanford University Ph.D. graduate Martin Casado and Stanford Professor Nick McKeown along with University of California at Berkeley professor Scott Shenker.

Nicria has positioned its SDN technology as doing for networking what traditional virtualization has done for compute. NVP is based on Open vSwitch, an Apache 2 license open source standard designed to enable "massive" network automation though software interfaces including OpenFlow that virtualize switches and related hardware.

"Virtual networks can be created, grown, moved, and dynamically configured on demand without touching or configuring the hardware," said Martin Casado, CTO and one of Nicira's founders, told Virtualization Review blogger David Davis in an interview published earlier this month. As a Ph.D. candidate at Stanford, Casado also invented the the OpenFlow switching specification now supported by Cisco Systems, Facebook, Google, Hewlett-Packard Co., Intel, Juniper Networks and NEC, among others.

The software runs on industry standard x86 servers and works with major hypervisors. VMware officials pledged to maintain Nicira's heterogeneous support. VMware CTO Steve Herrod said in a blog post that Nicira will continue to support multiple hypervisors and cloud platforms. "We are absolutely committed to maintaining Nicira's openness and bringing additional value and choices to the OpenStack, CloudStack and other cloud-related communities," Herrod noted.

VMware emphasized it intends to extend its virtualization technology to full network and datacenter automation last week when announcing that CEO Paul Maritz would assume the role as chief strategy at VMware parent EMC. When that transition takes place Sept. 1, EMC Information Infrastructure Products President and COO Pat Gelsinger will take over as VMware's CEO.

On an investor call last week announcing the management shakeup, EMC's CEO Joe Tucci argued that "the time to make these changes is from a position of strength." For now that appears to be the case. VMware Monday announced record quarterly revenue. For the second quarter, revenues of $1.12 billion increased 22 percent over the same period last year.

Speaking to analysts on VMware's earnings call Monday, Maritz likened VMware's move into network virtualization to the early days of server virtualization. "By turning physical servers into software entities, we were able to transform sever automation and provisioning," Maritz said, explaining the company will look to stake similar leadership in network virtualization and datacenter automation.

To be sure, this technology today is suited for the largest of infrastructures and it could be years before it becomes mainstream. "With the acquisition of Nicira, VMware becomes well positioned to provide virtual network functionality not just in the context of vCloud and vSphere but to be able to provide it to other heterogeneous non-vSphere-based pools of infrastructure as well so this represents a deepening and a broadening of our strategy," Maritz added.

Analysts on the earnings call questioned the premium VMware is paying for closely-held Nicira but Maritz defended the large cash outlay. "We saw tremendous strategic value in being able to claim a position of leadership as we move into these new phases of the software-defined data center," he said. "So obviously, given the size of the price tag, we believe that this is of the utmost strategic importance going forward. We believe it was a somewhat unique asset and we believe that this is going to strengthen our competitive position."

The deal is a coup for Netscape founders and VC investors Marc Andreessen and Ben Horowitz, who invested $17 million of the $50 million raised by Nicira. Andreessen told Forbes the deal was "one of the largest all-cash acquisitions of a private tech company." The breakdown includes $1.05 billion in cash and approximately $210 million in assumed unvested equity awards, VMware said.

The deal, approved by the boards of both companies, is set to close by the end if this year.

About the Author

Jeffrey Schwartz is editor of Redmond magazine and also covers cloud computing for Virtualization Review's Cloud Report. In addition, he writes the Channeling the Cloud column for Redmond Channel Partner. Follow him on Twitter @JeffreySchwartz.