Unpacking Cisco’s Last-Minute Acquisition Of AppDynamics

It’s like a trick play in sports, like a flea flicker, or fake field goal kick, or a surprise bunt and suicide squeeze — the list goes on and on, but for AppDynamics, the dramatic sports analogies are plentiful. Set to IPO this week and begin trading at or slightly below its last private valuation price, AppDynamics was just scooped up by Cisco in a $3.7B transaction. Let’s quickly unpack the key takeaways from the deal:

1/ A success 10 years in the making: The company announced its initial round of VC funding nearly nine years ago, April 2008 to be exact (link to press release). If we assume that both Greylock and Lightspeed split the round, and not factoring in any dilution or clauses, and if we assumed a $30M valuation at that time for the company on the high end, on a gross basis this would represent nearly a 123x gross multiple on that round. (In fact, according to CNBC’s Ari Levy — a darn good reporter — the VCs above each own about 21% of the company, presenting a $770M return for each, presumably.)

2/ Enterprise outcomes scaling: Many observers will comment that not only are there not many relatively new tech companies which have truly scaled like Google, Facebook, Amazon, etc., on the enterprise and B2B side, we have Oracle, LinkedIn, Workday (the last two as Greylock wins), and a few others, but not many that get into rarified air of having a multibillion dollar outcome that sustains. Given that trading for AppDynamics on the public exchange wouldn’t have been predictable, this allows investors to cash out immediately without waiting for the 6-month lockup and also juices employees’ holdings significantly.

3/ Cisco transforming before our eyes: Cisco is over 30 years old, a huge $150B company built around network architecture. Now with AppDynamics and their team, Cisco can offer its customers richer data and deeper business insights as the company transitions from a network and hardware centric company toward more software-defined (and, read: recurring SaaS and cloud) service and delivery models. Recall that just six months ago, Cisco laid off 5,500 workers (about 7% of its workforce) in an attempt to shed costs, free up cash, and reposition the company to take advantage of a software- and cloud-driven architecture.

4/ Another benchmark for SaaS founders/VCs: A hot early-stage SaaS deal can escalate in price quickly. For example, a large VC firm which invests in a hot SaaS company at a $300M post-money valuation may be hoping it turns into the 10x outcome like AppDynamics, but those are rare. Let’s now consider that according to their S-1 filing, the company boasted just under 2000 customers, many from the Fortune 500, and top line revenues of about $150M last year, so the public market might have valued them at 10-12x revenues, whereas the private market nearly doubled that implied value by being able to ingest the team, tech, and distribution advantage it has from its current market foothold. Like any big priced outcome, we should expect SaaS VCs to use this as a data point to both justify paying up for a great team and tech but also used to justify staying away from high-priced deals which don’t show a similar path.

5/ “The Art of The Deal:” This is the juiciest part of the story, to know how the deal went down. I wish I did know, but my guess would be that the execs and board members who are supremely networked at the highest levels of the Valley were able to run a dual-track process to position the company for IPO while also courting suitors (like Cisco, which boasts over $70B of cash on its balance sheet) to take a look now before it would become costlier and more of a hassle to acquire a public company. Just like LinkedIn opted to take the cash and live inside a larger web scale platform, AppDynamics made the call to take the same approach, taking what is presumably a majority-cash offer as a better deal than the pomp of ringing the NASDAQ bell later this week.

This begs the question — aside from true outliers like Airbnb, Uber, Snap, etc., will most (not all) companies that actually IPO be adversely-selected? An open question for debate as 2017 unfolds, but to the folks who built AppDynamics up over the last decade and the folks who crafted the art in this deal — well played, folks, well played.

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2017 Semil Shah.

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