Barely a day before its IPO, Jyoti Bansal’s AppDynamics stunned everyone by announcing it was instead getting acquired by Cisco in a deal which was so hush, hush that even the bankers involved in the listing process had no idea about. The question then is what led to this deal?
On December 28, 2016, AppDynamics Inc, an application intelligence company, announced it had publicly filed Form S-1 with the US Securities and Exchange Commission (SEC) for a proposed initial public offering of its common stock.
Morgan Stanley, Goldman, Sachs & Co and JP Morgan were acting as lead book-running managers for the proposed offering. Barclays, UBS Investment Bank and Wells Fargo Securities were acting as joint book-running managers. AppDynamics was supposed to be the first IPO of 2017, but it was never to be. So, what did AppDynamics bring to the table that led Cisco to pay such a massive amount?
To understand this, it is important to note what AppDynamics provide.
AppDynamics for the layman is a startup that provides solutions that help companies detect and resolve problems with their website and app. It does so by providing instant insights into end-users web experiences. Beyond that it provides information on the end users browser type, version and devices, as well as the geographical distribution of end users. AppDynamics also provides detailed content load times, as well as errors. It also enables clients the ability to track and trend how key performance indicators (KPIs) are impacted by browser performance.
On the mobile it helps identify and provide resolution for mobile application crashes and errors, visibility into mobile usage across devices, networks, operating systems, connection types and software application versions and the ability to monitor detailed load, latency and errors metrics for network and API requests.
Does it have competition? It surely does. In the form of systems management vendors, it has to deal with BMC Software and CA, Inc. Its closest competition, is however, companies like Dynatrace and New Relic. There are then giants like Hewlett Packard and Microsoft that pose competition to AppDynamics.
AppDynamics is a solid company with innovative products, good revenue, but with little control of its expenses. For tech giants like Cisco with large cash reserves, acquiring a nimble startup like AppDynamics makes sense and fits well. Not to forget 15 patents that have already been issued, 84 pending patents, 14 international Patent Cooperation Treaty applications and eight additional pending patents that Cisco will now have access to. Beyond this, the following may have got Cisco interested.
As more-and-more companies take the digital route, the solutions that AppDynamics provide will be increasingly in demand. According to Gartner, the IT operations market in 2016 is expected to be $23 billion, and the business intelligence and analytics market is expected to be $17.1 billion, resulting in a total addressable market (TAM) of $40.1 billion in 2016. The market is expected to grow at 7.6% annually to $53.8 billion in 2020. AppDynamics internal estimates show the TAM for its solution is about $12 billion. With the acquisition, Cisco has its hand in a lucrative pie.
AppDynamics targets mid-to-large-size organizations worldwide, such as Global 2000 companies. As of October 31, 2016, the company had approximately 1,975 customers, including more than 275 of the Global 2000, located in over 50 countries across every major industry. With the acquisition, Cisco has a company which shows strong growth in its ability to attract clients.
The startups billings for the fiscal years ended January 31, 2014, 2015 and 2016 were $62.1 million, $140.2 million and $258.5 million, respectively, representing year-over-year growth of 126% and 84%. For the nine months ended October 31, 2016, billings were $237.0 million, representing year-over-year growth of 44%.
For AppDynamics, the recurring contract value has increased from about 155 as of January 31, 2014 to more than 630 customers as of October 31, 2016. Additionally, as of October 31, 2016, the company had approximately 170 customers with a total contract value greater than $1 million, compared to 20 such customers as of January 31, 2014. The average contract value increased from approximately $64,000 in the fiscal year ended January 31, 2014 to approximately $169,000 in the three months ended October 31, 2016.
With the acquisition, Cisco has bagged a company that be a good add-on for its enterprise IT infrastructure solution and help make inroads into new markets.
What’s in to for Jyoti Bansal
Valuation- AppDynamics had announced the price band for each share would be between $12 and $14. Certain existing stockholders, including General Atlantic AD), L.P., Adage Capital Partners, LP and Altimeter Partners Fund, have previously indicated an interest in purchasing $32.5 million in shares of common stock, at a price of $13 per share.
If the IPO had gone through, AppDynamics would be valued at about $2 billion, but at $3.7 billion, what Cisco offered was significantly more. Bansal’s 14% stake in AppDynamics would roughly translate into a payout of $525 million.
Good revenue, not profits – Like most tech startups, AppDynamics has a good revenue stream, but profits were elusive. The company incurred net losses of $68.3 million, $94.2 million and $134.1 million in the fiscal years ended January 31, 2014, 2015 and 2016, respectively, and $95.1 million in the nine months ended October 31, 2016.
The revenues for the fiscal years ended January 31, 2016 stood at $150.6 million, growing 84% year-over-year. For the nine months ended October 31, 2016, revenue was at $158.4 million, representing year-over-year growth of 54%. Public markets are less forgiving of losses and without any clear indication of when profitability can be reached, getting acquired at a handsome price makes much more sense.
In addition, as a result of becoming a public company, every company incurs a significant amount of additional legal, accounting and other expenses, which you do not incur as a private company. AppDynamics was clear that it expected revenue growth rate to decline in the future.
Number of Unicorns
The number of Unicorns, or companies valued at more than $1 billion has ballooned over the past few years. Private investments have led to startups being often valued at multiples far beyond their revenue. Most of them are not profitable. With the global IPO market still being choppy, tech Unicorns avoid listing on the stock exchanges.
World’s most valuable startup – Uber and AirBnB have both indicated they are not going for an IPO anytime soon. By being acquired, AppDynamics does not have to go through the lengthy listing process and strict regulatory compliances later on.