Cisco to acquire AppDynamics for $3.7B

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Cisco has been a customer of AppDynamics for more than two years. Prayitno/CC BY-SA 2.0

Cisco announced its plans to acquire privately held application intelligence software platform provider AppDynamics the same week the company was set to launch an IPO—the first of 2017. Cisco's price tag: $3.7 billion, much higher than the $1.9 billion at which the company previously had been valued.

The San Francisco-based AppDynamics makes software that manages and analyzes applications, and it has about 2,000 paying customers, including its new owner, Cisco, and companies like Nike. The acquisition marks Cisco’s biggest since it bought security company Sourcefire for $2.7 billion in 2013, Reuters noted.

Rowan Trollope, Cisco senior vice president and general manager of Cisco's Internet of Things (IoT) and Applications Business Group, said applications have become the “lifeblood” of a company’s success, and keeping those apps running and performing well has never been more important.

“Unfortunately, that job has only gotten harder, as IT departments and developers struggle with a tangled web of disconnected, complex data that's hard to understand," he said in a press release. "The combination of Cisco and AppDynamics will allow us to provide end to end visibility and intelligence from the network through to the application; which, combined with security and scale, will help IT to drive a new level of business results."

The price Cisco is paying may sound high, but indicates just how important it views this slice of the software market and its role in IoT. Plus, there was that impending IPO.

“The fact that they were in their IPO process represented a window where we needed to make a decision," Cisco's corporate development vice president, Rob Salvagno, told Reuters.

The $3.7 billion offer from Cisco is nearly double the $1.9 billion valuation AppDynamics received in its last financing round in November 2015, according to Reuters. Cisco's offer comes out to roughly $26 per share, higher than the estimated $12 to $14 per share range it was planning.

Hilton Romanski, chief strategy officer at Cisco, told The Wall Street Journal that Cisco has been an AppDynamics customer for more than two years and Cisco put a premium on the IPO price partially because of the company’s high revenue growth.

RBC Capital’s Mitch Steves said in a research note that while the transaction value appears to be high, “we view more software related revenue as a long-term positive … we remain positive on shares of Cisco given its continued move towards software & security related revenue,” Barron's reported.

RELATED: Cisco to buy Jasper for $1.4B to pursue IoT

AppDynamics will continue to be a led by CEO David Wadhwani as a new software business unit under Trollope. The acquisition is expected to close in Cisco’s third quarter of fiscal year 2017.

Last year, Cisco spent $1.4 billion to acquire Jasper Technologies, which powers a number of IoT applications including Amazon's Kindle book downloads, and works with a variety of mobile operators, including AT&T