VMware to buy Nicira for $1.26B in a strategic leap of faith

Nicira’s CTO Martin Casado

VMware (s vmw) will shell out $1.26 billion in cash and an assumption of existing equity to buy Nicira, a company that has built software to do for networking what VMware has done to virtualize computing. That’s a lot of money, especially when you consider how few production-level implementations there are of the software-defined networks that Nicira is building.

Nicira was created five years ago and has raised $50 million from investors that included Diane Greene, an original founder of VMware. It makes controller software that helps free the act of moving data and packets around a network from the constraints of networking hardware  — an increasingly tough problem inside highly virtualized and webscale data centers. As I explained in a story on its launch (it was titled, “Meet Nicira. Yes, people will call it the VMware of networking”):

Nicira is one of several companies attempting to solve the problem that Greene helped create when she co-founded VMware to push hypervisors and virtualization. Once servers were virtualized, it created an easy way to separate computing from the physical infrastructure. The benefits of server virtualization were more-agile compute infrastructures — a developer would spin up a server in minutes as opposed to waiting days for approvals — as well as consolidating IT. Storage followed, but holding the whole virtualized infrastructure effort back was networking. Like a bird with its wings clipped, IT was tethered to the physical hardware by networking.

Nicira has plenty of paying customers including eBay (s ebay), AT&T (s t), Rackspace (s rax) and NTT, but it’s unclear how many of these are running Nicira’s controllers in their production environment. With this purchase, my sense is that VMware is paying big money to get in on this space because its collaborations with Cisco (s csco) have failed to deliver on a true solution for many of its customers, and it can’t afford to be left behind as the wave of interest and eventual spending on software-defined networking hits a peak.

In a blog post covering the deal, VMware CTO Steve Herrod explains that Nicira will fit in with VMware’s vision of a software defined data center — although the specifics of that vision have yet to be unveiled. And it’s true that if we consider how Nicira customer Calligo is using the Nicira controller, it fits within what I would think of as a software-defined data center — essentially a pool of compute resources that are tied together with software and where the physical hardware can reside in different data centers and pulled up for use as needed. The whole process is programmable and automated.

In pushing this model, VMware was always going to have to sign partnerships to deliver the software-defined networking elements, because its own VXLAN option was more of a an encapsulation scheme than a true separation of the networking logic from the hardware pushing the bits. By buying Nicira, VMware has chosen a software-defined networking vendor that plays with open protocols such as Open Flow, but is still focused on keeping a proprietary edge to its business. That’s a similar strategy that VMware seems to be pursuing as well.

The deal is expected to close during the second half of this year. The deal includes approximately $1.05 billion in cash plus approximately $210 million of assumed unvested equity awards.