Cisco's $3.7 Billion Purchase of AppDynamics: A Strategic Mistake or a Necessity?
The acquisition of AppDynamics by Cisco for $3.7 billion in 2015 has been a topic of much debate. The question of whether it was a strategic mistake or a necessary move lies at the intersection of business strategy, leadership, and the intricate dynamics of the tech industry.
The Nature of the Deal
The acquisition of AppDynamics by Cisco is, at its core, a classic example of a premium purchase aimed at staying relevant in the rapidly evolving tech landscape. With the industry's increasing focus on cloud computing, the deal was seen as a strategic move to enhance Cisco's capabilities and maintain its competitive edge.
Strategic Context
The tech industry is characterized by rapid innovation and disruption. Companies that fail to adapt and integrate new technologies quickly risk becoming irrelevant. In this context, offering an 85% premium to acquire a company like AppDynamics is not uncommon. The premium reflects the significant value that such a company brings to the table, especially in terms of technology and market presence.
AppDynamics is a leading provider of application performance management (APM) solutions and is crucial in the monitoring and management of cloud-native applications. By acquiring AppDynamics, Cisco sought to bolster its position in the dynamic cloud computing space. This was a strategic decision, particularly given the company's lack of talent for developing new technologies in-house. The acquisition allowed Cisco to tap into AppDynamics' core competencies and bring them under the Cisco umbrella.
Management Challenges
However, the challenges Cisco faces are significant. The quality of management within the company is under scrutiny, especially when it comes to handling acquisitions and preserving shareholder value. With a staggering $71 billion at hand, the company's leadership has demonstrated a concerning pattern of mismanaging these funds through failed acquisitions.
A History of Acquisitions Gone Wrong
The Cisco acquisition history is replete with examples of mismanaged deals that have led to substantial financial losses. Here are a few notable cases:
Scientific Atlanta: Acquired in 2005 for $6.9 billion, Scientific Atlanta was liquidated in 2015 for only $0.45 billion. Inflation-adjusted, this amounts to nearly a 95% loss on the investment. WebEx: Acquired in 2007 for $3.2 billion, WebEx is still struggling to turn a profit after 10 years. Flip: Acquired in 2009 for $590 million, Flip was shut down in 2011.These acquisitions represent just a fraction of Cisco's extensive history of failed acquisitions. The pattern of wasting billions of dollars on ill-conceived deals underscores a systemic issue within the company.
The Future of the Acquisition
The acquisition of AppDynamics by Cisco carries its own set of risks. Given the company's track record of mismanaging large-scale acquisitions, the likelihood of this deal turning into another fiasco is quite high. However, the desperate need to stay relevant in the cloud computing space, combined with a desire to retain AppDynamics as a key player in the ecosystem, provides some rationale for the acquisition.
Desperation and Leadership
Cisco's management is faced with a difficult situation. With an bloated treasury and stagnant growth, there is immense pressure to prove that the acquisition was a wise move. The state of the company, as of the turn of the century, has not significantly changed. Organic growth peaked in 2000, and since then, management has demonstrated a significant lack of competence in handling high-profile acquisitions.
Under these circumstances, the decision to acquire AppDynamics was understandable. Without a strong in-house technology development capability, the acquisition was a necessary step to remain competitive. The outcome, however, remains uncertain and is highly dependent on the successful integration and management of AppDynamics into Cisco's ecosystem.
Conclusion
The acquisition of AppDynamics by Cisco for $3.7 billion is a double-edged sword. While it addresses the company's immediate need for technology and market presence, the history of failed acquisitions casts a shadow over the future. Whether this deal will ultimately be seen as a strategic mistake or a necessary step remains to be seen. Only time will tell if the acquisition will bring the desired benefits or if it will join the long list of Cisco's mismanaged acquisitions.