By Rachael King and Dana Cimilluca

Cisco Systems Inc. is buying software company AppDynamics Inc. for $3.7 billion, plucking the startup from IPO registration at a big premium in an effort to bolster its software offerings to large enterprise customers.

AppDynamics, whose software helps companies including Cisco monitor the performance of their applications, was gearing up to be the first tech company to go public this year. The company was expected to price Wednesday night, and earlier Tuesday bankers increased the IPO's estimated price that would have valued AppDynamics at as high as about $2 billion.

Cisco agreed to pay about $26 a share, according to a person familiar with the matter, well above the company's original price range of $10 to $12 a share.

Under CEO Chuck Robbins, Cisco has placed increasing importance on software. The company has long held a dominant share of sales of the routing and switching equipment used to funnel data over the internet and between computers in data centers. As competitors enter the market with less expensive options, Cisco has focused on other business lines such as security, collaboration and the "Internet of Things."

Cisco's price nearly doubles the $1.9 billion valuation that AppDynamics' investors placed on the company in late 2015. Those backers include venture firms Greylock Partners and Lightspeed Venture Partners, which each owned 20.8% of AppDynamics valued in the deal at over a half-billion dollars.

AppDynamics had originally planned its debut for December but postponed the offering due to uncertainty following the U.S. presidential election. The company was set to lead an expected charge of IPOs after one of the slowest years for new U.S. listings in more than a decade.

The startup was founded in 2008 by veteran startup engineer Jyoti Bansal, who saw that companies were becoming more reliant on increasingly complex software. Customers such as airlines, banks and retailers use the software to monitor the performance of their applications to ensure they are running smoothly.

One of the benefits of AppDynamics's software is that it lets companies monitor applications and fix problems across different cloud services from companies like Alphabet Inc.'s Google and International Business Machines Inc. This will become increasingly important as companies shift their applications to run in data centers from multiple providers.

"In a multi-cloud world, your ability to maintain quality of service andvisibility can become obfuscated," said Hilton Romanski, chief strategy officer at Cisco, in an interview.

He said Cisco has been an AppDynamics customer for more than two years. Cisco put a premium on the IPO price partially because of the company's high revenue growth. In the first nine months of 2016, AppDynamics lost about $95 million on revenue of $158 million, up about 54% from a year earlier.

AppDynamics, which will continue to be led by CEO David Wadhwani, will become a new unit in Cisco's Internet of Things and Applications business. Cisco has long promoted the shift to the "Internet of Things" -- a concept describing the myriad of network-connected devices -- as the next major phase in the evolution of the internet. Last year, Cisco bought Internet of Things platform maker Jasper Technologies for $1.4 billion.

Beyond the Internet of Things, Mr. Romanski expects to spread AppDynamics's technology across a number of businesses including core networking, security and network analytics.

Write to Rachael King at rachael.king@wsj.com and Dana Cimilluca at dana.cimilluca@wsj.com

(END) Dow Jones Newswires

January 24, 2017 21:58 ET (02:58 GMT)

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