In case you missed it yesterday afternoon, Cisco acquired application performance management vendor AppDynamics
for $3.7 billion,
just two days before the company’s slated IPO. Why did Cisco pay so much for the company—more double the amount AppDynamics expected to raise in its IPO, more than double the market cap of its closest competitor, New Relic, and roughly 24x AppDynamics’ 2016 revenue?
In one word: microservices. In three words: microservices within enterprises.
Cisco’s press release
talks a lot about “digital transformation” which is just a fancy way of saying that companies need to build better applications. Consumers demand them and employees demand them. Microservices architectures are the key to delivering them, primarily because microservices make it possible to manage, scale and iterate on the various components independently.
However, while this is great for speed and flexibility, having to manage all those services can be a recipe for complexity. Hence yesterday’s acquisition. Cisco wants a piece of the pie as enterprises start deploying microservices at a large scale, and AppDynamics sells software for monitoring and managing them. It also has a pretty large existing enterprise customer base.
If you’re wondering why Cisco didn’t make a play for New Relic, which is only available as SaaS, a line from this Cisco blog post
should provide an answer: “The acquisition of AppDynamics also supports Cisco’s strategic transition toward software-centric solutions that deliver predictable recurring revenue.” Cisco is not much of a cloud service provider
and, at least for the time being, many enterprises still buy software.
$3.7 billion is a lot of money, but at least it appears to be an investment in the future.