Just a day before its much ballyhooed initial public offering (IPO), AppDynamics has called off plans to go public. The San Francisco-based provider of application optimization software instead accepted a $3.7 billion acquisition offer from Cisco.

The decision puts a wrinkle in the tech IPO market, which had heralded AppDynamics entry as a bellwether of change after the close of the worst year for IPOs since 2009.

AppDynamics had planned to sell 13.8 million shares, which means it would have raised more than $165 million and doubled its existing value to about $2 billion.

But Cisco upped the ante: The deal values AppDynamics at about $26 a share — a significant premium over the $12 maximum share price it expected on the open market, according to its latest SEC filing

Cisco's Interest in AppDynamics

Cisco,  founded in 1984, is best known as a manufacturer of networking hardware and telecommunications equipment used to send data over the internet and between computers in data centers. It was the most valuable company on earth on March 27, 2000, with a market capitalization of $569 billion.

Today, with technology moving out of data centers and into cloud services offered by the likes of Amazon and Microsoft, its market capitalization is a fraction of what it was — approximately $152 billion.

Like many legacy tech companies, it is challenged to reposition itself as a high growth company of the future. Last February, Cisco CEO Chuck Robbins bought Internet of Things (IoT) cloud platform Jasper Technologies for $1.4 billion. Now, it snapped up AppDynamics — a buy Constellation Research analyst Holger Mueller told CMSWire shows Cisco knows it "needs to reinvent itself and create new revenue streams, morphing from a networking vendor to an enterprise software vendor."

Robbins, in a statement about the acquisition, suggested there was synergy between networks and applications, or more specifically, keeping both up and running. He reasoned that by combining AppDynamics software with Cisco's network architecture, customers would have first of its kind end to end insight across their technology stack, from infrastructure to application.

This insight, according to Robbins, will enable the delivery of improved customer experiences and accelerated revenue opportunities, according to a blog post he penned related to the acquisition. To make investors happy, Robbins added that the acquisition of AppDynamics "also supports Cisco's strategic transition toward software-centric solutions that deliver predictable recurring revenue."

A Long-Term Play?

Constellation Research founder and lead analyst R "Ray" Wang believes there are bigger possibilities.

While the acquisition looks like just apps management, he suggested the long-term play involves network intelligence and, more importantly, "a critical piece for IoT as well as building a long-term neural network and machine learning story. We ultimately don't want to be monitoring apps and the network in a manual fashion but to predict, prevent, and deliver situational awareness," Wang said.

As hybrid clouds, network infrastructures and overall app environments grow more complex, "the ideal is to move to more automated and AI driven tools," he said. This acquisition gives Cisco a place holder into this market and a better software story. 

But the AppDynamics buy won't be enough, and Cisco has to make more acquisitions this year to accomplish those long-term goals.

"It'll be interesting what else it picks up that sits on data that will feed its longer term AI networks and devices strategy. Cisco is moving from a networking/hardware company to a data and insights player," he said, noting that it will take time and "at least 25 more acquisitions," he said.

The Fate of AppDynamics

Did AppDynamics walk away from a brighter future by selling to Cisco? Wang doesn’t think so.

"AppDynamics gets saved from what would have been a lackluster IPO," he told CMSWire. Mueller noted that the startup had a record of burning through cash fast.

So in the end, the Cisco-AppDynamics deal might just be good for both parties. AppDynamics customers will be part of a larger ecosystem, Cisco will own a high-growth software provider that can be central to its ecosystem and early investors in AppDynamics just walked away with a nice chunk of change.