The hypervisor is dead, for VMware to stay relevant it has to continue innovating higher up the stack. The acquisition of Nicira will allow VMware to have a play in the service provider market and do just that.
It also provides an avenue for VMware to port it’s higher level applications to run on multiple hypervisors. This has the potential to slow flow of customers to free platforms like Hyper-V and OpenStack.
While this isn’t the best thing for the Cisco relationship, the reality of the matter is that VMware and Cisco have an “Open” relationship where both companies work with many others. I don’t see this relationship changing in the long run.