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Cisco: The Unicorn Cowboys

Published by Colin Ferrian and Evan Woollacott

What you need to know: Last night, Cisco announced their intent to acquire AppDynamics for $3.7B in cash.

What’s our take?

AppDynamics  is a leader in helping enterprises monitor and optimize their application performance. This technology allows businesses to track how well their applications and websites are running to prevent network connection performance issues or crashes. The amount of data in customer’s applications and operations has grown exponentially and ensuring the efficient performance of these applications and being able to detect performance problems early-on is critical. The AppDynamics acquisition extends the value Cisco brings to its customers; the combination enhances a customer’s network and application performance.

What is AppDynamics?

  • The San Francisco-based company offers a cloud application and business monitoring platform to improve application performance. The software provides real time visibility into application and IT infrastructure performance, leveraging machine learning and analytics.
  • As of October 2016, they had nearly 2,000 customers and around 1,186 employees, and they compete with the likes of F5 Networks (NASDAQ: FFIV), Riverbed (Private: Thoma Bravo), and New Relic (NYSE: NEWR).

What’s this mean for the two companies?

  • Skipping the IPO: AppDynamics was set to IPO under the ticker APPD on Thursday, January 26th, and was expected to sell 12mm shares between $12-$14; An implied market cap of $1.6B, versus Cisco’s offer for $26 per share, or 100% premium. In other words, this is a gift for AppDynamics.
  • Acquisitive strategy continues: This acquisition is the sixth largest in Cisco’s history and 13th acquisition since Chuck Robbin’s CEO appointment in July 2015, but it fits well with the company’s strategic focus on increasing software and recurring revenue mix.

How expensive is it?

  • Very expensive: The deal represents roughly 18x revenues for a company with a net loss run rate of ~$118mm. For comparison, Oracle (NYSE: ORCL) paid 11x revenues for Netsuite’s $1B in revenues and $17mm in profits while their founder, Larry Ellison owned 40% in the acquired company.
  • Justification via Recurring Revenues: In their most recent S1 filing, AppDynamics reported revenue growth of 54% in the nine months ending October 31st, and which also includes 82% growth in subscriptions revenues (~75% of total revenues).
  • Cisco still has $71B in cash, offset by $36B in debt, so we expect they continue on their shopping spree.

Who are the real winners here?

  • AppDynamics raised about $365 million in equity funding from a handful of notable venture capital firms. The big winners in the sale include Lightspeed Venture Partners (20.8% stake), Greylock Partners (20.8%), Institutional Venture Partners (8.3%) Kleiner Perkins Caufield & Byers (7.1%) and General Atlantic (5%). Most recently, AppDynamics secured a $158 million round in December 2015 at a $1.9 billion valuation. (Source: Pitchbook)

Why is Cisco the Unicorn Cowboy?

Cisco’s been on a roll of +$1B purchases over the past few years. Here’s a quick summary:

2012: NDS Group purchased for $5B
2012: Meraki purchased for $1.2B
2013: Sourcefire purchased for $2.7B
2016: Jasper Technologies purchased for $1.4B

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