Some Thoughts About Cisco’s Acquisition of AppDynamics

This week, Cisco announced that it is buying enterprise software company appDynamics for an astonishing $3.7 billion. The price almost doubled the $1.9 billion valuation that investors placed on the company in 2015. The premium price amounts to roughly $36 per share, significantly above the expected IPO price for appDynamics. The application performance monitoring(APM) vendors was expected to price its IPO at about $10 to $12 a share.

The acquisition of AppDynamics represents another step by Cisco towards building a solid enterprise software offering. More importantly, the acquisition has relevant implications for different segments of the enterprise software space. Let’s discuss a few of those:

1 — AppDynamics Investors Won Big

Venture capitalists were among the biggest winners in the acquisition of AppDynamics. Firms such as Greylock Partners and LightSpeed Venture Partners help big equity stakes in the company at about 20.8% ownership. Other investors such as Battery Ventures were also among the winners. Even the late stage, growth funds that entered in AppDynamics’ last funding rounds were able to realize big returns.

2 — M&A Continues to be cheap

In an unstable environment for public markets on which big enterprise software incumbents are enjoying healthy balance sheets, the M&A climate continues to be very favorable. In the case of Cisco, the acquisition of AppDynamics could be considered cheap compared to the valuation the APM vendor could have achieved if the price of the IPO soared on early trading.

3 — Cisco Continues its Emphasis on Software

The acquisition of appdynamics represents another example of Cisco’s efforts to enhances its enterprise software portfolio. Under CEO Chuck Robbins, Cisco has been performing important acquisitions of software platforms that complements its networking and hardware offering.

4 — AppDynamics IOT Efforts Will Be Accelerated Under Cisco

In recent years, AppDynamics launched new APM offerings for IOT topologies. Even though AppDynamics’ IOT stack was nothing short of impressive from a technological standpoint, its adoption has been relatively limited. With Cisco’s presence in the IOT space, Appdynamics IOT offerings are likely to experience a larger and more consistent adoption.

5 — Mixed News for the IPO Market

The acquisition of AppDynamics represents mixed news for the software IPO environment. The APM vendors was expected to inaugurate the IPO market in 2017. From that perspective, Wall Street will be missing a solid stock that could compete with similar public traded equities such as NewRelic or Splunk. However, the large premium that Cisco paid for AppDynamics is a sign that the healthy validation of some tech unicorns can be validated in the public markets.

6 — Who Will Get Acquired Next?

Is hard to tell whether Cisco’s acquisition of AppDynamics will immediately trigger other acquisitions in the APM space. With most of the big players such as Splunk or NewRelic trading at premium valuations as public companies the target for acquisitions could centered on emerging APM startups. Companies such as HPE, Oracle or VMWare(Dell) could be potential acquirers.

CEO of IntoTheBlock, Chief Scientist at Invector Labs, I write The Sequence Newsletter, Guest lecturer at Columbia University, Angel Investor, Author, Speaker.

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