VMware to Buy Nicira Network Software for $1.26 Billion

VMware Inc. (VMW) is buying Nicira Inc. for $1.26 billion in cash and equity, adding technology that helps networks run more efficiently to broaden its appeal to companies seeking to cut hardware costs.

Palo Alto, California-based VMware, already the biggest maker of software that enables computers to handle multiple operating systems, will use the technology to offer similar services for networks that link computer systems, Paul Maritz, VMware’s chief executive officer, said yesterday in a statement.

Software such as Nicira’s is designed to give technicians a faster and more efficient way to manage network changes and monitor them from one place. The products could help VMware lessen the need for types of networking equipment sold by Cisco Systems Inc. (CSCO), said Brian Marshall, an analyst at ISI Group.

“This is kind of a match made in heaven,” said Marshall, who’s based in San Francisco. “You’re taking a leader in virtualized networks and the gorilla of the dominant vendor in server virtualization.”

Cisco said yesterday that it’s cutting about 1,300 jobs, or 2 percent of the workforce, to reduce costs and streamline decision making as economic malaise threatens growth.

VMware is paying $1.05 billion in cash and $210 million of unvested equity awards for Nicira, which was founded in 2007 and also based in Palo Alto. Nicira was advised by Frank Quattrone’s Qatalyst Partners LLC.

Horowitz Backing

Nicira had raised $50 million in venture funding from investors including Andreessen Horowitz, LightSpeed Venture Partners and New Enterprise Associates. The company, which only recently shipped its first production-ready systems, could help make VMware a key provider of technology across servers, networks and storage for the coming decade, said Ben Horowitz, a Nicira board member and Andreessen Horowitz partner.

Horowitz wrote on his blog yesterday that the acquisition gives VMware a shot at taking a “good portion” of the $37 billion data networking market. Horowitz said Andreessen Horowitz invested $17.7 million in Nicira.

Bloomberg LP, the parent of Bloomberg News, is an investor in Andreessen Horowitz.

VMware, 80 percent-owned by EMC Corp., separately reported second-quarter profit that beat analysts’ estimates as companies invested in its virtualization software. VMware had reported some preliminary quarterly figures when it said last week that Pat Gelsinger will succeed Paul Maritz as CEO.

Beating Estimates

Profit excluding certain costs was 68 cents, VMware said yesterday in a statement. That compares with the 67-cent estimate, according to analysts’ forecasts compiled by Bloomberg. Net income fell 13 percent to $191.7 million, or 44 cents a share, from $220.2 million, or 51 cents, a year earlier. Sales rose 22 percent to $1.12 billion, in line with preliminary estimates the company released last week.

VMware last week also raised its revenue predictions for the year to as high as $4.64 billion from $4.63 billion, which is “a modest surprise” given the weak economy, said Cowen & Co. analyst Gregg Moskowitz in a note.

“If they don’t raise guidance as a result of this acquisition people will think they bought their way to the earnings forecast for the year,” said Brian Freed, an analyst at Wunderlich Securities Inc. in Denver. Still, “it’s a good strategic fit. Network virtualization is a logical place for VMware to go.”

EMC Results

EMC, the world’s biggest maker of storage computers, said today that sales and profit for the year will meet prior forecasts. Full-year 2012 profit, excluding some items, will be $1.70 a share, on revenue of $22 billion, the company said in a statement, affirming its July 17 forecast. EMC said in April it would “meet or potentially exceed” those forecasts.

Net income for the second quarter rose 19 percent to $649.5 million, or 29 cents a share. Earnings, excluding some items, increased to 39 cents a share, matching the preliminary results announced last week. Sales climbed to $5.31 billion.

EMC gained 2.2 percent to $25.34 at the close in New York, while VMware slipped less than 1 percent to $88.89. VMware has climbed 6.9 percent this year, and EMC has increased 18 percent.

To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net; Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editors responsible for this story: Lisa Rapaport at lrapaport1@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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