VMware is considered to be among the leading developers of virtualization software, which lets individual servers and desktops divide resources and run as multiple 'virtual' machines.
Under the deal, Cisco will pay the money to VMware's parent company, EMC Corporation, in exchange for shares in VMware. The total value of the shares will give Cisco a 1.6 per cent stake in the company.
EMC is planning to offer 10 per cent of VMware's shares in an IPO later this year.
In exchange, VMware said that it will consider appointing a Cisco executive to its board at a later date.
The companies plan to use the investment to begin collaboration projects that include optimizing VMware's products for Cisco's hardware. The two companies also said that they intend to embark on a joint marketing operation.
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