AppDynamics Deal Boosts Cisco's Infrastructure and App Stack Push

Cisco Systems this week made an offer to AppDynamics it couldn't refuse. Cisco's $3.7 billion deal to acquire AppDynamics, the leading supplier of application performance monitoring (APM) software, came just days before AppDynamics planned to go public.  

Cisco reportedly paid more than twice the amount what AppDynamics was aiming to fetch at the time of its IPO, which was scheduled for Wednesday, leading some to shake their heads at the premium the networking giant was willing to pay. With this deal, Cisco is also acquiring AppDynamics for a whopping 20 times its earnings. AppDynamics recorded revenues of $158 million during the first nine months of its fiscal year 2016, according to the company's prospectus. While that pointed to more than a $200 million year for AppDynamics, the company's year-over-year growth during the nine-month period was 54%. Despite the premium paid, Cisco executives reminded Wall Street that it has a good track record for capitalizing on its big deals.

Cisco CEO Chuck Robbins responded to a question by CNBC about the premium paid, noting that AppDynamics is the leading supplier of cloud-based APM and argued it's growing nearly twice as fast as its next competitor, New Relic. Moreover, Robbins argued AppDynamics is growing faster than any publicly traded software company today.

Indeed, AppDynamics is regarded as the leading provider of cloud-based APM software. The eight-year-old company can take telemetry from the application stack down to the code layer to either predict pending performance issues and to track the cause of those that occur, while providing business impact analysis. AppDynamics can monitor performance of applications in datacenters as well as public clouds including Amazon Web Services, Microsoft Azure and the Google Cloud Platform. As organizations move to hybrid clouds, software-defined infrastructures and use more Internet-of-Things devices, Cisco is looking toward the ability to holistically measure telemetry of apps at all of those tiers.

"The synergies between the application analytics that they can drive and the infrastructure analytics that we can drive across both private and public clouds creates business insights for our customers that no one else can deliver," Robbins told CNBC. "What we're doing with AppDynamics is to really help our customers understand what's going on in their environments."

During a conference call with media and analysts this week, AppDynamics President and CEO David Wadhwani explained why he decided to ditch the company's IPO at the 11th hour and accept Cisco's bid.  "It's inevitable in my mind that we are moving to a world that's going to be focused on systems of intelligence," he said. "We are in that rarified position that can redefine not just how IT departments operate but how enterprises as a whole operate."

AppDynamics is used by many large enterprises including Nasdaq, Kraft, Expedia and the Container Store. In all, AppDynamics claims that 270 of the 2000 largest global companies use its platform. Wadhwani said Cisco, which is used by almost all large organizations, has an opportunity to extend AppDynamics' reach through its extensive channel partner network. The deal to acquire AppDynamics also comes as Cisco is on the cusp of rolling out its Tetration analytics platform, which the company claims will provide monitoring and telemetry for all activity in the datacenter.

"We saw an opportunity here together to provide a complete solution," said Rowan Trollope, senior VP and general manager of Cisco's Internet of Things and applications business, during this week's analyst and media briefing. "Infrastructure analytics, paired together with application analytics, to provide not just visibility into the application performance, candidly visibility and insight into the performance of the business itself."

Enterprise Management Associates VP of Research Dennis Drogseth said presuming Cisco can successfully integrate AppDynamics with Tetration could advance business performance management technology. Vendors touting BPM solutions have to deliver on the promises of such offerings to date, according to Drogseth.

"One of the questions I'm not sure they know the answer to is are they going to have a central analytic pool? Will all of the data from AppDynamics feed into the machine learning engine of Teration? Or, when they have the two together, could Tetration move to a cloud environment? And how will those two integrate? But again, it could be a very promising combination."

Asked by analysts on a conference call announcing the deal why Cisco was paying such a high premium for AppDynamics, executives pointed to its 2013 acquisition of Meraki, which provided a cloud-based platform for central management of Wi-Fi networks and mobile devices for $1.2 billion. At the time the deal was announced Meraki's annual revenues were $100 million. "Today, it's at a $1 billion bookings rate," said Rob Salvagno, Cisco's VP of corporate development. "And we see the same potential for synergies in this opportunity,"

Posted by Jeffrey Schwartz on 01/27/2017 at 1:15 PM