After all, while it’s not fair to pin VMware’s stock price on a startup that wasn’t shipping product a year ago, you can’t help but notice VMware is down 20 percent in the past 12 months (Cisco, by comparison is up by about 60 percent). VMware — which coincidentally announces earnings today — could start feeling pressure to make the Nicira deal pay off. The answers might be clearer in another month, when VMworld arrives.
Was $1.26 Billion Really Worth It?
Last August, analyst Peter Christy of 451 Research argued on SDNCentral that the deal was worth it. Not for the return on investment — nobody thought Nicira would pay for itself quickly — but because the potential reward, and the potential risk of missing the deal, were big enough to justify spending only 3 percent of VMware’s market capitalization.
“The first time I ran into this affordability argument was when Microsoft bought WebTV,” Christy says. “Someone asked Ballmer, ‘Why are you paying so much for this piece of crap?’ Ballmer said, ‘Think of it as a $1 billion insurance policy.'”
It’s pretty well accepted that Cisco drove up Nicira’s price tag, with rumored bid of at least $700 million, Christy says (while also noting there’s quite a gap between $700 million and $1.26 billion).
There was some anticipation that the Nicira deal would create a gold rush for acquisitions, but that didn’t really happen. Months later, Cisco acquired Cariden for about $141 million, and Juniper bought Contrail Systems for around $176 million — modest and reasonable sums.
“I think they bought Nicira at the peak. We haven’t seen any other SDN acquisitions of note,” says Zeus Kerravala, principal analyst with ZK Research.
SDN Turf Wars
On a larger scale, the Nicira acquisition was a sign VMware was ready to become a networking company, which couldn’t have made Cisco happy. “It was a big acquisition for VMware. It wasn’t necessarily taking them out of their comfort zone but it was a significant reach into — to use John Chambers’ term — adjacencies,” says Brad Casemore, an analyst with IDC.
Arguably, that’s damaged VMware in the short term, Kerravala says. “You could argue there was no better alliance in tech than VMware and Cisco — and now look at Cisco: Their last half-dozen or so acquisitions all mention Hyper-V in some respect.”
It’s a turf war that might have happened anyway but was exacerbated by VMware essentially getting into networking. “Everybody has to produce growth for their shareholders, and there are only so many places you can go to get growth. Everybody’s in a bit of a turf war,” Casemore says.
On the plus side, Nicira replenished VMware’s engineering team, which had been poached away by SDN startups, Christy says. As the one-year anniversary of the actual acquisition approaches, it’s going to be important to hang onto these people.
“Given the executive fluctuations within VMware, I think it’s important for them to retain as much of that leadership team at Nicira as possible,” Casemore says. “It would give all of us some concern if we were to see Mr. Casado and some of the principals leave.”
Countdown to VMworld
The Nicira deal was closed days before VMworld last year, so there wasn’t much for VMware to say about the deal. This year, it’s going to be different — or that’s what everyone assumes, anyway.
“I do think the expectations are relatively high, in terms of what we’re going to see, in terms of the integration, of how it’s going to tie into the whole idea of the data center,” Casemore says. “The spotlight shines a little brighter.”
VMware is pinning its future on the software-defined data center (SDDC), so it’s reasonable to expect some details about how Nicira could advance that cause. For example, Nicira could help push the SDDC onto architectures that aren’t cloud-based — the type of architecture that isn’t VMware’s strength — Christy says.
The SDDC is important in a larger sense because VMware needs to expand beyond server virtualization. Initiatives in that direction, such as Cloud Foundry, haven’t brought in the results. Nicira is “important in their broader mission,” Christy says.
Of course, the other big vendors want to own the data center, too.
“Cisco is a big presence. They’re on a trajectory of growing more valuable within the confines of the data center. VMware has to do the same thing, and EMC has to do the same thing,” Casemore says. Tying Nicira, and the NSX software announced in March, to a broader data-center story would be important, “especially in the light of what’s happening with Cisco and Insieme,” he says.
Check out more about Nicira on SDNCentral: