Cisco Acquires AppDynamics: The Right Decision for Both Companies?

Cisco continues to modernize and diversify its product listings with the $3.7 billion acquisition of AppDynamics. Cisco announced the purchase of the application performance monitoring (APM) company on January 24, 2017, the same week AppDynamics was expected to have its initial public offering. As of its last valuation, AppDynamics was priced less than $2 billion, making the sale a massive monetary gain for the company that was founded in 2008.

With tech companies that go public there is never any certainty—just look at Twilio or AppDynamics’ APM competitor New Relic, both of which have had neutral showings since their IPOs—so this exit is a sensible one. The purchase is not only beneficial for AppDynamics, but for Cisco too, as the enterprise steadily shifts into new spaces outside of its standard network hardware offerings.

Cisco’s Strategic Purchases

Back in 2000, Cisco was the most valuable company on Wall Street, worth roughly $580 billion in market capital. However, the network hardware company known for revolutionizing routers was a major casualty of the dot-com bubble burst and really has never recovered. Today, Cisco has a market cap of more than $150 billion (no small number in its own right) and has shown signs of growth over the past five years. A prominent driver of this growth has to do with Cisco spreading out into new technology spaces via acquisitions.

Acquisitions
  • 2007: WebEx for $3.2 billion
  • 2016: Jasper for $1.4 billion
  • 2016: CloudLock for $293 million
  • 2015: Tropo for undisclosed price
  • 2015: OpenDNS for $635 million

In February 2016, Cisco purchased Jasper, an internet of things (IoT) platform, for $1.4 billion, which is seen as a good fit for Cisco based on their network hardware’s compatibility with the IoT space. Dating back to 2007, Cisco purchased WebEx, a popular web conferencing solution and perennial leader in the G2 Crowd Web Conferencing Grid℠ Report. Other acquisitions include Tropo, a cloud API platform, in May 2015; OpenDNS, which provides network security; and CloudLock, a cloud security solution, in June 2016, among a long list of others. Each of these purchases, along with the most recent AppDynamics acquisition, all provide Cisco with the ability to enhance its network hardware services or a chance to capitalize on the opportunity for expansion business software applications offer.

The Smart Exit for AppDynamics?

Recent tech IPOs have been unsturdy. Last year’s darling, Twilio, surged to a high of $70.96 per share not long after going public, but quickly came back down to earth and, on January 24, 2017, closed at $28.73. A more proper comparison for the AppDynamics’ IPO that never was is New Relic. A competitor in the application performance monitoring space, New Relic went public in December 2014. New Relic, which opened its IPO around $30.00, closed on January 24, 2017 at $33.80, essentially unchanged over the extended period (note that New Relic’s stock spiked 15 percent after the announcement of the AppDynamics acquisition).

So was selling AppDynamics for nearly twice its value a good move for the company?

Based on G2 Crowd’s user satisfaction data, the sale of AppDynamics seems like a very logical exit. AppDynamics has lower Satisfaction scores across the board compared to New Relic, which has the highest Satisfaction scores in the Application Performance Monitoring category.

Note: All data comes from product reviews by verified users as of January 25, 2017.

The Smart Exit for AppDynamics?

Recent tech IPOs have been unsturdy. Last year’s darling, Twilio, surged to a high of $70.96 per share not long after going public, but quickly came back down to earth and, on January 24, 2017, closed at $28.73. A more proper comparison for the AppDynamics’ IPO that never was is New Relic. A competitor in the application performance monitoring space, New Relic went public in December 2014. New Relic, which opened its IPO around $30.00, closed on January 24, 2017 at $33.80, essentially unchanged over the extended period (note that New Relic’s stock spiked 15 percent after the announcement of the AppDynamics acquisition).

So was selling AppDynamics for nearly twice its value a good move for the company?

Based on G2 Crowd’s user satisfaction data, the sale of AppDynamics seems like a very logical exit. AppDynamics has lower Satisfaction scores across the board compared to New Relic, which has the highest Satisfaction scores in the Application Performance Monitoring category.

AppDynamics
Meets Requirements
8.5
Ease of Use
8.2
Ease of Setup
7.2
Ease of Admin
7.6
Quality of Support
8.1
Ease of Doing Business With
7.4
New Relic APM
Meets Requirements
8.9
Ease of Use
8.2
Ease of Setup
9.0
Ease of Admin
8.1
Quality of Support
8.6
Ease of Doing Buisness With
8.5

It appears to be pragmatic, based off of this information, for AppDynamics to sell versus going public. Logic would tell us that if the leader in the space that has more highly satisfied users has a difficult time showing consistent growth, AppDynamics would likely have a similar challenge ahead of it were it to go public.

Also, as TechCrunch points out, “AppDynamics filed to go public in December, where it showed decent revenue growth but slightly widening losses. Enterprise companies that are generating a profit generally seem to be palatable to public markets, whereas AppDynamics seems like it was in the growth stages of its life.” This might be an unambitious opinion (from someone going cross eyed over the thought of $3.7 billion), but ultimately the sale to Cisco is the safe play and a smart exit. It will be interesting to see if other companies with potential IPOs in 2017 make similar moves or march into the unpredictability of the market.