Cisco Systems Inc. (Nasdaq: CSCO) agreed to acquire AppDynamics Inc. for $3.7 billion, snapping up the fast-growing software maker just before it planned to go public.
Cisco, the world’s biggest maker of networking gear, will add AppDynamics’ software and services that help companies to monitor and fine-tune the performance of their own business systems. Businesses turning to SaaS has been one of the drivers in tech M&A. AppDynamics, based in San Francisco, was scheduled to price its initial public offering on Jan. 25 in this 2017’s first major U.S. technology IPO, according to data compiled by Bloomberg.
Chief executive officer Chuck Robbins has been buying software and services companies, working to fire up Cisco’s revenue growth, which has stalled as the computing industry shifts away from expensive fixed hardware and software. Since taking the helm in 2015, Robbins has sought to transform Cisco by offering customers more flexible, customizable products that will generate recurring revenue over time. In other software deals, Thoma Bravo is buying a majority stake in enterprise software developer Plainview and Hewlett Packard Enterprise Co. (NYSE: HPE) is purchasing hyperconverged infrastructure tech maker SimpliVity.
“It is important for Cisco to have market-leading software in our portfolio to deliver on this journey that we’ve been on for some time,” said Hilton Romanski, Cisco’s head of corporate strategy. “This asset is best in class. We believe this is one of the best teams out there to help us on our journey.”
The acquisition will be paid for with cash and assumed equity awards, San Jose, California-based Cisco said in a statement. AppDynamics will become a unit in Cisco’s IoT and Applications business, reporting to Rowan Trollope. The deal is expected to close in Cisco’s fiscal third quarter, which ends in April.
Founded in 2008, AppDynamics helps businesses track how well their applications and websites are running so they can respond to connection slowdowns or crashes. The company was valued at $1.9 billion in a private funding round that closed in November 2015, a person familiar with the matter said at the time.
The $3.7 billion price dwarfs the market value of as much as $1.72 billion that AppDynamics was seeking to reach in its IPO. That total is based on the high end of the offer range of $14 per share and a total of 123.1 million shares outstanding after the public offering. Cisco’s Romanski said his company is paying for AppDynamics’ growth rate, which makes it stand out from software rivals.
AppDynamics had $158.4 million in revenue in the nine months ended Oct. 31, an increase of more than 50 percent from the same period a year earlier, according to an IPO filing. Romanski said Cisco’s security business was an AppDynamics customer.
Cisco is one of the richest companies in technology, with $71 billion in total cash, cash equivalents and investments at the end of its most recent quarter. About $10.4 billion of that is located in the U.S.
For a company like AppDynamics, a buyout gives existing investors a defined return. Had the company gone public, investors would be left selling down the stake over time.