Here's Why Cisco Spent $3.7 Billion to Buy AppDynamics

Cisco announced one of the most expensive acquisitions in the company's history this week. The $3.7 billion deal to buy application performance management (APM) company AppDynamics is the latest in a string of moves under CEO Chuck Robbins, signifying the enterprise IT giant's transition away from its traditional networking hardware business as it heavily invests in software and services.

"It's no strategy shift," said Milan Hanson, Senior Analyst at Forrester. "It's a stated strategy from both [former CEO] John Chambers and Chuck Robbins: broaden Cisco's offerings to better meet the needs of customers in the digital revolution. This acquisition, or one like it, or a revelation of a skunkworks project for APM: any one of those three would have been a natural step in executing that strategy."

There are plenty of interesting elements to the deal, not the least of which is that Cisco scooped up AppDynamics one day before the company was set to go public. The company filed for an initial public offering (IPO) of up to $100 million in December, and its potential shares were estimated in the $12-$14 range. Even by the standards of AppDynamics' most recent valuation ($1.9 billion after its last funding round in November 2015), Cisco spent a hefty chunk of change. Though, when you enter as established and profitable a Software-as-a-Service (SaaS) space as APM is by buying one of the market leaders, it's not going to be cheap.

AppDynamics, Dynatrace, and New Relic are the established market leaders in the APM and website monitoring landscape. Hanson explained that the deal makes sense on a number of levels.

"AppDynamics is a passionate group of people with a good solution that fills a strategic gap for Cisco," said Hanson. "It's a good fit to quickly expand Cisco's breadth, and is a group of people who want to be the best and have been doing quite well at it. AppDynamics is [also] a market leader in APM. Buying a market leader ought to be expensive, shouldn't it? But it also makes a statement: Cisco is serious about meeting the needs of digital enterprises and paid serious money for a serious contender. Too much money? Only time will tell."

What Will Cisco Do With AppDynamics?

Cisco is no stranger to massive acquisitions. The enterprise IT giant spent $1.4 billion on Internet of Things (IoT) cloud platform Jasper Technologies (now Cisco Jasper) just last year, and dropped $2.7 billion on network cybersecurity and firewall provider Sourcefire back in 2013. Even smaller acquisitions such as that of Linux container startup ContainerX all serve the same underlying software-focused shift.

The company has also made tough decisions to serve its overall transition, laying off 5,500 workers over the summer as it refocused resources around its collaboration, video conferencing, and software-defined networking (SDN) software and services.

According to Cisco's official announcement, the company plans to integrate AppDynamics across its technology stack to improve end-to-end application monitoring, network monitoring, and infrastructure management. Cisco's statement indicates that the acquisition also "supports Cisco's strategic transition toward software-centric solutions that deliver predictable recurring revenue."

"AppDynamics' monitoring of user experience, applications, and infrastructure complements Cisco's strength in monitoring everything network," explained Hanson. "For the best analytics insights, you want to eliminate blind spots, and AppDynamics expands Cisco's monitoring. Meeting a customer's performance expectations depends on the interplay of multiple systems. For example, a new version of an application may cause a formerly adequate infrastructure to be suddenly inadequate, impacting customers. If you want to prevent that, you want analytics to be considering data from all of those systems."

Hanson said the big question now is how Cisco will position the various analytics engines they'll soon possess. There's a certain advantage in having one omnipotent analytics engine for cross-functional insight, he explained, but there's also value in having multiple specialized analytics engines for deep analysis of networks, databases, or cloud resources.

"The business value of integrating AppDynamics with Cisco is faster, more effective problem detection and prevention. And when inevitable problems do occur, faster analysis and repair of those problems," said Hanson. "Longer-term, the business value lies in understanding how technology will affect business results, which brings us back to Cisco's strategy: empower the digital business."

Ripple Effects in the APM Market

Cisco's sudden "Kool-Aid Man barging through the wall"-like acquisition on the eve of AppDynamics' IPO is going to shake up the APM space. Hanson believes other APM vendors will immediately pounce on the uncertainty this creates. "We may see some smaller players get together or seek to be acquired by another big player or desperately try to avoid it," said Hanson. "All players in the APM market have been broadening their offerings so they can feed a more complete set of data into their analytics and automation engines. This move may slightly accelerate that trend."

Analytics and automation is the end game, according to Hanson, and he said the broadest-possible monitoring is the means to that end. "Keep in mind that this move doesn't make Cisco unique: CA Technologies, IBM, BMC, HP Enterprise, and Microsoft are also broad players with APM solutions," said Hanson. "This move alone won't upset the APM market much, it will just accelerate the trend already happening."

AppDynamics will continue to be led by President and CEO David Wadhwani as a new software business unit under Rowan Trollope, Senior Vice President and General Manager of Cisco's IoT and Applications business. The acquisition is expected to close in Q3 2017.

This article originally appeared on PCMag.com.