What Cisco's AppDynamics Acquisition Means for the Space
February 10, 2017

Gabriel Lowy
TechTonics

Share this

Cisco's acquisition of AppDynamics – and the premium it paid – represents a "statement acquisition" that addresses several converging trends in both technology and financial markets. For strategic acquirers and tech investors, the acquisition is about delivering value to users and improving business outcomes through a go-to-market model that drives recurring revenues.

First, the acquisition validates the importance of application performance and user experience (UX) as companies become more software-defined in their digital transformation. To lift employee engagement and productivity, as well as customer satisfaction and loyalty, companies are making secure UX a top priority amid the increased complexity of networked private, public and hybrid cloud architectures and the constant threats they face.

Cisco's stated motivation confirms our recent posts on the needed convergence of network and application performance monitoring and security monitoring to enable the secure UX enterprise. We have posited that next to database, no technology investment is more strategic to the enterprise than a unified approach to secure UX. Advances in technology not only make this convergence feasible, but essential.

The acquisition also addresses the expanding definition of "user" in the Internet of Things (IoT) age to include machines. Machine learning is becoming table stakes technology to monitor and manage machine-to-machine communications. Tellingly, AppDynamics will report to the head of Cisco's IoT and software business.

Finally, the acquisition acknowledges the growth of DevOps practices to improve business performance by delivering higher quality software faster and more efficiently. Container-based stacks that facilitate microservices architecture with more developer-friendly protocols such as REST and JSON have made DevOps easier to implement, driving further adoption.

Cisco CEO Chuck Robbins continues to push the company toward software. With AppDynamics, Cisco can further promote its SDN/NFV initiatives with services providers and enterprises.

The Wall Street View

AppDynamics had raised $314 million in funding over the past nine years. The last round valued the company at $1.9 billion. Cisco's $3.7 billion 11th hour acquisition – or a 60% premium to the proposed IPO price – reflects strong investor demand for the stock.

In fact, it's a favorable sign for the tech IPO market in general that the underwriters kept raising the offering price through the road show. This bodes well for other IPOs on the horizon as the money that portfolio managers had earmarked for AppDynamics is now free for redeployment.

However, expect to see more of these last-minute acquisitions. Companies can now file their S-1 – a registration statement that companies intending to go public must file with the Securities and Exchange Commission (SEC) – just three weeks before listing as opposed to three months previously. The S-1 provides strategic buyers with most of the relevant information they need. But they must act fast.

According to the AppDynamics S-1, the company had an annualized billings run rate of $315 million with year-to-date 9-months revenues of $211 million. The multiples that Cisco is paying for forward billings and revenues were not only negotiated to provide AppDyamics' venture capital (VC) investors ‘upside protection" against the expected pop in the stock post-offering.

The valuation is also consistent with two other investment themes that financial markets have already validated:

Investors continue to have strong appetite for new IPO companies (or any public company for that matter) that show a clear path to profitability while sustaining rapid revenue growth owing to well-developed go-to-market execution within an expanding Global 2000 customer base; and,

That software-as-a-service (SaaS) business models and the greater intelligence advanced analytics provides to drive better decision outcomes fetch substantially higher valuations than legacy on-premises license and maintenance models. This is due to the predictability and long-term customer value of their recurring revenue streams and the cash flows those streams generate.

Conclusion

As enterprise applications become more numerous, intertwined and complex, IT organizations are placing more emphasis than ever on finding new approaches to manage applications and optimize their availability and performance. As they become more software-defined and seek to get better returns on their digital assets with advanced analytics, more are recognizing that this is not attainable without secure UX.

Our 2014 study of S&P 500 companies found that those that take a unified approach to user experience outperform their peer group in revenue growth, profitability and market valuation. These companies grow faster and generate higher profit margins, resulting in premium valuations and stock price performance relative to their respective peer groups. The study also found that companies with a unified approach deploy 30% fewer tools on average to get the job done.

The fundamental investment themes that have driven the stock market higher in the early days of the Trump Administration – increased infrastructure spending and repatriation of cash held overseas – also bodes well for public tech companies and those planning an IPO. The former is expected to drive capital investment with a strong presence for IoT and AI in both smart cities and business applications.

The latter could provide a boost to domestic M&A activity, opening a new door for exit strategy. This would strengthen the leverage of VCs and managements in negotiating the sale of a company. But larger companies are willing to pay premiums for technology that promises to accelerate their time-to-market.

Gabriel Lowy is the founder of TechTonics Advisors, a research-first investor relations consultancy that helps technology companies maximize value for all stakeholders by bridging vision, strategy, product portfolio and markets with analysts and investors
Share this

The Latest

January 23, 2018

Today, there are multiple market research studies that discuss and estimate a thriving growth for the application development segment. The market scenario seems relevant and business-ready for the growing popularity of applications. In order to keep the performance and functioning of the applications upbeat, enterprises are increasingly considering application performance management (APM) ...

January 22, 2018

Self-service and the concept of “Shift Left” are some of the phrases you will hear the most in the modern service management industry. The reason being is that you want to provide your users with the most important knowledge that you can to help them solve their issues and problems themselves, saving you time to focus on more important priorities. It’s a common problem, sort of a chicken and egg approach, but when you help your internal teams better meet their needs through such efforts, you also want to make sure that what is best for your service department also is best for your users ...

January 19, 2018

Confidence in satisfying and supporting core IT has diminished due in part to a strain on declining IT budgets and initiatives now progressing beyond implementation into production mode, according to TEKsystems' annual IT Forecast research ...

January 18, 2018

Making predictions is always a gamble. But given the way 2017 played out and the way 2018 is shaping up, odds are that certain technology trends will play a significant role in your IT department this year ...

January 17, 2018

With more than one-third of IT Professionals citing "moving faster" as their top goal for 2018, and an overwhelming 99 percent of IT and business decision makers noticing an increasing pace of change in today's connected world, it's clear that speed has become intrinsically linked to business success. For companies looking to compete in the digital economy, this pace of transformation is being driven by their customers and requires speedy software releases, agility through cloud services, and automation ...

January 16, 2018

Looking back on this year, we can see threads of what the future holds in enterprise networking. Specifically, taking a closer look at the biggest news and trends of this year, IT areas where businesses are investing and perspectives from the analyst community, as well as our own experiences, here are five network predictions for the coming year ...

January 12, 2018

As we enter 2018, businesses are busy anticipating what the new year will bring in terms of industry developments, growing trends, and hidden surprises. In 2017, the increased use of automation within testing teams (where Agile development boosted speed of release), led to QA becoming much more embedded within development teams than would have been the case a few years ago. As a result, proper software testing and monitoring assumes ever greater importance. The natural question is – what next? Here are some of the changes we believe will happen within our industry in 2018 ...

January 11, 2018

Application Performance Monitoring (APM) has become a must-have technology for IT organizations. In today’s era of digital transformation, distributed computing and cloud-native services, APM tools enable IT organizations to measure the real experience of users, trace business transactions to identify slowdowns and deliver the code-level visibility needed for optimizing the performance of applications. 2018 will see the requirements and expectations from APM solutions increase in the following ways ...

January 10, 2018

We don't often enough look back at the prior year’s predictions to see if they actually came to fruition. That is the purpose of this analysis. I have picked out a few key areas in APMdigest's 2017 Application Performance Management Predictions, and analyzed which predictions actually came true ...

January 09, 2018

Planning for a new year often includes predicting what’s going to happen. However, we don't often enough look back at the prior year’s predictions to see if they actually came to fruition. That is the purpose of this analysis. I have picked out a few key areas in APMdigest's 2017 Application Performance Management Predictions, and analyzed which predictions actually came true ...