Billion-Dollar Unicorns: AppDynamics Sold Before IPO

| About: AppDynamics (APPD)

Summary

AppDynamics was looking to go public early this year at an estimated valuation of $1.9 billion.

Then, in a sudden twist, it was acquired by Cisco for roughly twice the valuation at $3.7 billion.

This was Cisco's biggest acquisition since 2012 when it had spent $5 billion to acquire video software maker NDS.

A Gartner report estimates the IT operations market in 2016 to be a $23 billion industry. It also pegs the business intelligence and analytics market to be worth $17.1 billion. Together the two industries are estimated to grow 8% annually to $53.8 billion in 2020. Within the industry, the application performance monitoring market is seen as a $12 billion opportunity by Billion-Dollar Unicorn player AppDynamics (Pending:APPD). It was looking to go public early this year at an estimated valuation of $1.9 billion. Then, in a sudden twist, it was acquired by Cisco (NASDAQ:CSCO) for roughly twice the valuation at $3.7 billion.

AppDynamics Financials

San Francisco-based AppDynamics was founded in 2008 by Computer Associates alumnus Jyoti Bansal. He set up AppDynamics with the intention of creating a solution that could deliver application performance monitoring tools for growing distributed architectures. Essentially, he wanted to be able to "watch every line of code" in the world.

AppDynamics' platform provides organizations with a unified, real-time view into software application and IT infrastructure performance. It deploys self-configuring software agents into the enterprise's software application and IT infrastructure environments. The deployment can happen on cloud, on-premise, or hybrid environments. These agents then map business transactions at the code level of the underlying software applications and utilize machine learning to create dynamic baselines by determining the normal behavior of individual software applications and business transactions. The process enables customers to detect deviations from these norms.

AppDynamics' platform has been well received by the market. Its revenues for fiscal years ended January 31, 2014, 2015 and 2016 were $23.6 million, $81.9 million (up 247%) and $150.6 million (up 84%), respectively. However, AppDynamics was still not profitable. It incurred net losses of $68.3 million, $94.2 million and $134.1 million in the fiscal years ended January 2014, 2015, and 2016, respectively. For the nine months ended October 31, revenues grew 54% to $158.4 million and losses increased marginally to $95.1 million from $92.4 million a year ago.

Till early this year, AppDynamics was venture funded with $315 million raised from investors including Altimeter Capital, General Atlantic, Battery Ventures, ClearBridge Investments, Sands Capital Ventures, Lightspeed Venture Partners, Greylock Partners, Kleiner Perkins Caufield & Byers, and Institutional Venture Partners. Its last round of funding was held in November 2015 when it raised $158 million from Altimeter Capital and General Atlantic at a valuation of $1.9 billion.

AppDynamics' Acquisition

Last year, AppDynamics filed its prospectus to list on the Nasdaq. It announced a price range of $12-$14 a share and planned to sell 12 million shares. The listing would have valued it at $1.9 billion. Its stock issue was oversubscribed. And then, in a dramatic twist, a few days before it was to list in January, Cisco announced the acquisition of AppDynamics at $3.7 billion. Clearly, Cisco paid a hefty premium for the company. This was Cisco's biggest acquisition since 2012 when it had spent $5 billion to acquire video software maker NDS.

Cisco paid the premium to accelerate its transformation from a hardware-focused company to a software-focused one. The merger will help Cisco deliver end-to-end visibility and intelligence from the network through to the application. It plans to leverage AppDynamics' tools to provide customers with intelligent and actionable insights, helping them make speedy business decisions and improve business performance.

Clearly, AppDynamics preferred the cash upfront instead of betting on the public market to assess a fair value for its business. The sale also ensured that the insiders were able to cash in on the value instead of waiting for the initial six-month lock-in period to pass.

Of late, the market has not been very generous to the valuations of start-ups. Its competitor New Relic (NYSE:NEWR) hasn't had a very smooth ride post its IPO. New Relic had listed in 2014 at a stock price of $23 each. Last year, New Relic's stock had fallen from a high of $40 to its IPO levels. Only recently has the stock been faring better with a trading price of $36.82 and a market capitalization of $1.9 billion. For the December ended quarter, New Relic had reported revenues of $68 million and a net loss of $13.89 million. With the sale, AppDynamics has spared itself the choppy ride of the public market.

For the entrepreneur, management team and the investors, the story ended well. This unicorn turned out to be a legitimate one.

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