AppDynamics deal shows buyouts more lucrative in anemic IPO market

Wed Jan 25, 2017 2:39pm EST
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By Sweta Singh and Ankur Banerjee

(Reuters) - Cisco Systems Inc's (CSCO.O: Quote) surprise and costly acquisition of business software firm AppDynamics Inc just two days ahead of its market debut suggests that U.S. tech startups are finding more value in buyouts amid a still-tepid IPO market.

Cisco said on Tuesday it agreed to buy AppDynamics, which makes software to manage and analyze applications, for $3.7 billion.

The offer price is more than double what the company would be valued at - $1.7 billion - if its shares were priced at the top end of its estimated IPO price range.

The deal will allow AppDynamics investors to exit their holdings completely, compared with a roughly 10 percent exit if the company listed its shares.

The M&A route may be more attractive not only for tech startups whose valuations have taken a hit over the past year, but also for traditional tech companies such as Cisco, which are looking to boost revenue through deals as they struggle to grow organically.

"I think this does reflect that the valuations are still relatively conservative," said Richard Truesdell, co-head of global capital markets at law firm Davis Polk & Wardwell.

"Certainly (AppDynamics) seems to have hit the jackpot ... this is the most dramatic disparity in valuation between the two markets that I can think of seeing recently."

Cisco's announcement comes a week after Hewlett Packard Enterprise Co (HPE.N: Quote) said it would buy cloud startup SimpliVity for $650 million in cash.   Continued...

The logo of Dow Jones Industrial Average stock market index listed company Cisco is seen in San Diego, California April 25, 2016.  REUTERS/Mike Blake/File Photo