VMware will acquire Nicira, a startup, for $1.05 billion in cash and $210 million in equity rewards, according to company statements.

The deal is expected to close during the second half of this year, and will lead to many benefits for VMware.

Nicira already produces a Network Virtualization Platform (NVP) – made on OpenFlow, an open source technology, according to SFGate.

“VMware/Nicira are going after the $37 billion data networking market, particularly new data centers being built with cloud computing,” SFGate reported. “With OpenFlow, they have a good chance to grab a lot of it.”

“VMware has led the server virtualization revolution, and we have the opportunity to do the same in datacenter and cloud networking,” Paul Maritz, outgoing CEO at VMware, explained in a news release. “The acquisition of Nicira adds to our portfolio of networking assets and positions VMware to be the industry leader in software-defined networking.”

The deal will need approvals from regulators. It has already been approved by the boards of directors of both companies. It was also approved by stockholders of Nicira.

Among the companies which use NVP are: AT&T, DreamHost, eBay, Fidelity Investments, NTT and Rackspace.

“Nicira helps customers dramatically improve business velocity and efficiency by transforming how networking works in the Cloud era,” said Steve Mullaney, CEO at Nicira.

“The value we bring to customers lies in our open approach and the richness of capabilities in network virtualization,” said Martin Casado, co-founder and CTO at Nicira. “The combination of Nicira and VMware brings together two pioneering teams, and gives customers the industry leading SDN solution for any cloud environment, on any hypervisor in the enterprise and with Service Providers.”

In addition, The New York Times reported the “software-centric” networking market could generate up to $2 billion in revenue in five years – even though it may not lead to over $100 million in revenue during 2012, Brent Bracelin, an analyst with Pacific Crest Securities, told The Times.

Still, VMware spending so much money on a “young upstart” was a surprise, according to some industry observers.

“We didn’t expect consolidation in this industry to happen for 12 to 18 months,” Bracelin told The Times. “We thought consolidation would happen after the new entrants were proven out by the market.”

Others in the industry suggest the importance of the deal cannot be underestimated.

“VMware buying Nicira is a big statement,” said Ben Horowitz, co-founder of Andressen Horowitz. Horowitz is a Nicira board member and Andreessen Horowitz was an investor. “It may define networking architecture over the next 30 years.”

In other company news, VMware reports that its Q2 revenues were $1.12 billion – an increase of 22 percent compared to the Q2 of 2011. In addition, operating income for the Q2 was $212 million – an increase of 13 percent from the Q2 of 2011. Non-GAAP operating income for the Q2 was $358 million – an increase of 23 percent when compared to the Q2 of 2011.

Also, Q2 net income was $192 million, compared to $220 million during the Q2 of 2011.

“The quarter’s strong performance reflects the continued confidence customers have in our solutions,” Maritz said in a VMware company statement. “Our products, amplified by the recent acquisitions, including Nicira, are providing the means for our customers to transform IT as we move into the Cloud Era.”

VMware has more than 350,000 customers and 50,000 partners. Pat Gelsinger will soon be taking over as CEO for VMware. Maritz may be in line to take over as CEO at parent company EMC – after his successful tenure at VMware, according to TechZone360. He is at least on the short list.