VMware (NYSE:VMW), the leader in virtualization software and cloud infrastructure, has entered into an agreement to acquire Nicira, Inc., a leader in network virtualization and software-defined networking (SDN). This acquisition will add to VMware’s portfolio of networking assets, enabling the company to become the industry leader in software-defined networking. The acquisition price is $1.05 billion in cash plus ~$210 million of unvested equity awards, and the deal is subject to regulatory approvals and customary closing conditions. VMware is betting on the software-defined data-center and claims that it will be the foundation of its cloud computing platform. 
Software Defined Datacenters Key To Virtualization
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Cloud computing is all about resource pooling and achieving efficiency in terms of capacity and costs. It uses software to abstract hardware resources and pools it into aggregate capacity which can be used efficiently as needed. Some of Nicira’s customers include AT&T, DreamHost, eBay, Fidelity Investments, NTT and Rackspace. The Nicira Network Virtualization Platform (NVP) is one the primary products used by the customers, and it accelerates service delivery from weeks to minutes and dramatically reduces complexity and cost.
Virtualization Software is the biggest division of VMware and constitutes 90% of the Trefis price estimate. If this acquisition increases VMware market share from its current projected ~40% to ~45% by the end of our forecast period, we can expect an upside of ~10% to the Trefis price estimate.
We have a $112 Trefis price estimate for VMware, which is around 25% above the current market price.Notes: