In a monumental move, Cisco Systems (CSCO.O) has unveiled its largest-ever deal, agreeing to acquire cybersecurity firm Splunk (SPLK.O) for approximately $28 billion. This strategic acquisition is aimed at strengthening Cisco’s software business and capitalizing on the burgeoning field of artificial intelligence (AI). It marks a pivotal shift for Cisco, reducing its reliance on its substantial networking equipment business, which has faced challenges in recent years due to supply chain issues and a post-pandemic slowdown in demand.
Cisco CEO Chuck Robbins emphasized the significance of the merger, stating, “The thing that gives you conviction is we are bringing together two companies around security and observability, which are two of the most important areas for our customers and areas where they are unlikely to cut spending in – just because of the criticality of these threats.”
Over the years, under Robbins’ leadership, Cisco has made efforts to diversify away from its hardware-focused roots and instead focus on software and services through various strategic deals. Splunk, renowned for its expertise in data observability, plays a crucial role in helping companies monitor their systems for cybersecurity risks and other threats, operating on a subscription-based pricing model.
Although the two companies had engaged in merger discussions in the past, those talks did not come to fruition. However, Cisco’s recent offer of $157 in cash for each share of Splunk, representing a 31% premium to the company’s last closing price, has sealed the deal. Despite some uncertainty regarding regulatory scrutiny, Splunk’s shares saw an increase of more than 21%, trading at $145.04, just below the offer price of $157, while Cisco’s shares dipped 4%.
Cisco already enjoys a data-security partnership with Splunk, and Splunk boasts an impressive clientele, including major companies like Coca-Cola (KO.N), Intel (INTC.O), and Porsche. Splunk experienced substantial revenue growth of nearly 40% last year, but in 2023, it has encountered an industry-wide slowdown in demand, attributed to rising interest rates and persistent inflation.
Both companies anticipate that this acquisition will accelerate revenue growth and boost gross margins at Cisco in the first fiscal year following the deal’s completion.
Thomas Hayes, chair of hedge fund Great Hill Capital, remarked, “Cisco bought a good synergistic business at a good price. It’s a win for both parties. This will give Cisco an edge in AI-enabled security moving forward.”
While acknowledging the overlap in the security business, some analysts have raised concerns about potential antitrust scrutiny. However, Cisco remains confident that the deal will not face significant regulatory hurdles. Robbins stated, “We don’t have any history of having (antitrust) challenges in the U.S. and the two companies coming together is quite synergistic – in the technology integration there is not a ton of overlap, so there is not a lot of concern about this being some sort of roll up that is going to stop competition.”
The acquisition, unanimously approved by the boards of both Cisco and Splunk, is expected to close by the end of the third quarter of 2024, subject to regulatory approvals, with no requirement for approval from Chinese regulators. Cisco executives anticipate the deal to be cash positive and to add $4 billion in annual recurring revenue. In the event the deal is terminated, Cisco will be liable to pay Splunk a termination fee of $1.48 billion.
In this bold move, Cisco is positioning itself to expand its software capabilities and fortify its presence in the ever-evolving world of cybersecurity, all while signaling its commitment to adapt and thrive in the dynamic technology landscape.