Cisco Systems will buy US business software company AppDynamics for about US$3.7 billion (A$4.9 billion), marking one of its largest deals of recent years as it searches for growth beyond its core networking business.
Legacy technology players like Cisco have been trying to shift their strategy to stay ahead of technology developments, such as the rise of cloud computing, that could otherwise threaten their core businesses.
Cisco's announcement comes a week after Hewlett Packard Enterprise said it would buy cloud startup SimpliVity for US$650 million in cash.
President Donald Trump's plan to incentivise US companies to repatriate their overseas cash could spur a new wave of dealmaking for large tech companies like Cisco, analysts say.
Rob Salvagno, Cisco's vice president of corporate development, said the acquisition fits Cisco's long-term direction and its transition toward software.
AppDynamics makes software that manages and analyses applications and it has about 2000 paying customers, including NASDAQ, Nike, and its new owner, Cisco.
Cisco swooped in to buy AppDynamics the day before the firm was planning to price its long-planned IPO. The company has been on its roadshow with investors.
"The fact that they were in their IPO process represented a window where we needed to make a decision," Cisco's Salvagno said
High price but software revenue positive
The US$3.7 billion offer from Cisco is nearly double the US$1.9 billion valuation AppDynamics received in its last financing round in November 2015. Cisco's offer comes out to roughly US$26 per share, higher than the estimated US$12 to US$14 per share range it was planning.
“Cisco made an offer that people felt was compelling,” said Ravi Mhatre, a board member at AppDynamics from LightSpeed Venture Partners.
RBC analyst Mitch Steves said in a research note that while the price for AppDynamics "appears to be high," he views more software revenue as a positive for Cisco.
AppDynamics will become part of Cisco's internet of things and applications unit, reporting to Rowan Trollope. Cisco's last large acquisition, Jasper, is also part of that unit.
It is Cisco's largest acquisition since it bought security company Sourcefire for US$2.7 billion in 2013.
The deal, which is a mix of cash and equity, is expected to close by April.