Why Cisco Is Spending $3.7 Billion on AppDynamics
Many were surprised when #Cisco (NASDAQ:CSCO) announced in late January its decision to buy #AppDynamics. Not the acquisition itself — Cisco’s major strategy, after all, involves buying tech start-ups and rebranding them under the Cisco parent name. What was surprising was the price and timing of the purchase. Cisco announced the deal the evening before AppDynamics was set to go public. Public investors interested in the company may have been disappointed, but Cisco did shell out a big number, buying the company for $3.7 billion in cash and equity options. This was more than double what the IPO price would have been, as shares at the top end of the company’s range would have priced the company at $1.7 billion. The $3.7 billion seems steep. AppDynamics only generated $158 million in first the nine months of 2016, for an annual run rate revenue of roughly $210 million, which means Cisco paid roughly 17 times revenue for the company. While AppDynamics did sport an impressive growth rate of 54% in the first nine months of 2016, that’s still a hefty price. Moreover, a previous round of financing for AppDynamics had come in at a valuation of $1.9 billion, so the IPO could have even been considered a “down round.” So, why did Cisco pay up? Let’s go through some of the possible rationales.