Software maker VMware said it will acquire privately held Nicira for US$1.05 billion in cash to expand its portfolio and establish a leading position in virtualised networks.
The deal, which is VMware's biggest acquisition to date, includes US$210 million of assumed unvested equity awards and is expected to close in the second half of 2012.
Nicira, a startup founded in 2007, sells software that lets customers create virtual networks that can operate independently of underlying physical networks in what is called software-defined networking.
The company has raised US$50 million from venture capital firms Andreessen-Horowitz, Lightspeed and NEA.
Diane Greene, co-founder and former CEO of VMware, has also invested in Nicira.
Ben Horowitz said his firm was Nicira's largest shareholder with an investment of US$17.7 million and will be paid in cash for the stake.
"VMware is probably the ideal fit," Horowitz said, adding that there had been plenty of interest in Nicira, which had driven up the price. "Still, in retrospect I think the deal will look cheap."
The networking market has an overall value of about US$37 billion and software-defined networking accounts for only a tiny part of that total.
According to research firm IDC software, defined networking will grow to US$2 billion by 2016 from US$200 million in 2013.
VMware Chief Executive Paul Maritz said, "This acquisition was made because of its strategic value as opposed to its current revenue value."
VMware pioneered server virtualisation and now it is poised to the same with virtual networks, said Maritz, who will be succeeded by Chief Operating Officer Pat Gelsinger on Sept 1.
"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 ...," he said.
In a report on Nicira, ISI group analyst Brian Marshall has said that "they should be able to work with VMware."
"VMware isn't doing anything similar but would naturally be interested in the market due to the potential value unlocked by network virtualisation," Marshall said in April.
He added that Nicira could create tens of thousands of virtual networks and would eventually be able to support more than 100,000 virtual networks.
Nicira counts AT&T, eBay and Fidelity investments among its customers.