VMware is paying $1.05 billion in cash for Nicira, a networking virtualization play that has big name customers and potential to be disruptive. The key word with Nicira is potential.
In many respects, VMware's Nicira purchase rhymes with EMC's 2004 purchase of VMware. EMC completed its VMware purchase in early 2004 and cited the combination of server and storage virtualization will be a foundation for years to come.
Obviously, EMC's $625 million acquisition of VMware paid off in a big way. VMware got to server virtualization early and built a big business around it. EMC benefited. Now VMware is acquiring Nicira, an early mover in networking virtualization, and hopes to garner the same rewards.
Nicira is to VMware what VMware was to EMC. Whether VMware wins the day with Nicira largely depends on whether virtualization lightning can strike twice. Did VMware spot an acquisition that can cement the company's position in the data center for the decades to come?
Paul Maritz, outgoing CEO of VMware, laid out the rationale for acquiring Nicira. Maritz noted that Nicira is VMware's largest acquisition to date and said:
Where does our appetite for such a large bite come from? It comes from the first of the big forces at work that I noted earlier. Our strategy is to be the leader in providing the software ingredients of the software-defined data center. The whole data center industry is in the midst of a transition towards an architecture comprised largely of standardized hardware building blocks, that run under the control of layers of software.
This approach provides a significant advance in terms of data center automation, increasing not only scale and efficiency but agility too. One just has to look inside the data centers of the leading public cloud services to see this beginning to play out. Indeed, VMware helped lay the foundation for the sea change by pioneering server virtualization. By turning physical servers into software entities we were able to transform server automation and provisioning.
Now similar changes are starting to roll through other data center functions. By extending the virtualization approach to these functions, it will be possible to create virtual data centers on demand, largely in software. VMware has already started work on network virtualization in the context of our vSphere and vShield products.
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. This represents a deepening and a broadening of our strategy.
Maritz was later asked about the price tag for Nicira. After all, Nicira's revenue doesn't justify the valuation. Maritz added:
This acquisition was made because of its strategic value as opposed to its current revenue value. We believe that this Company VMware was founded because it was able to be early on a leader in the virtualization server space, and that has built a company of enormous importance and value in the industry. We see similar forces at work here as we move towards the software defined data center and we saw tremendous strategic value in being able to claim a position of leadership as we move into these new phases or of the softly defined data center. So, obviously, given the size of the price tag, we believe that this is of the utmost strategic importance going forward.
Time will tell if VMware's big bet pays off, but there's some historical reasons within the EMC corporate family to believe it can work.