The burgeoning field of computer "virtualization," which enables a single computer to function like multiple machines, took a great leap forward Monday with word that Palo Alto-based business software maker VMware was buying computer networking specialist Nicira for nearly $1.3 billion.
With its announcement on the same day it reported second-quarter earnings that beat analysts' estimates, VMware is making a head-turning bet on a 5-year-old, privately held company, also based in Palo Alto, that raised a relatively paltry sum of $50 million from its early investors.
With its NVP, or network virtualization platform, Nicira (pronounced "nice era") will ostensibly do for networks what VWware has done for computers -- magically create multiple virtual networks that work together in tandem but unleash much more computing power than a single network could ever achieve.
VMware will pay $1.05 billion in cash, plus assume responsibility for $210 million in stock awards that Nicira had given its employees. The purchase of Nicira, whose early customers include AT&T, eBay (EBAY), Fidelity Investments and the Japanese telecom giant NTT, means a handsome payoff for its investors, including Andreessen Horowitz, Lightspeed Venture Partners and NEA.
"VMware has led the server virtualization revolution,
In a statement that described its efforts with Nicira as creating "the architecture for the cloud," VWware said "managing networks and network services to support cloud architectures is complex, time consuming," and the company praised Nicira for its cutting-edge work in boosting the power of data centers.
"Nicira helps customers dramatically improve business velocity and efficiency by transforming how networking works in the cloud era," Nicira CEO Steve Mullaney said in a statement. "I'm thrilled to be joining forces with VMware to help build the software-defined data center."
Analyst Trip Chowdhry with Global Equities Research said that while the move provides a way for VWware to broaden its virtualization efforts into software, the price it's paying for the young company raises troubling questions. He said the offer suggests "that we are in a valuation bubble," mentioning a previous big-ticket purchase that another valley giant recently announced.
"This purchase is as irrational if not more irrational than Facebook buying Instagram for $1 billion," Chowdhry said. "VMware should not be throwing shareholders' hard-earned money at unproven companies with unproven concepts. What's the business model here? I don't know, do you?"
Strategically, Chowdhry said, the acquisition does make sense. "But when you pay a billion plus, that tells me you've lost your senses," he said. "And that's very scary."
The Associated Press contributed to this report. Contact Patrick May at 408-920-5689; follow him at Twitter.com/patmaymerc.