Cisco’s Blockbuster Acquisition: Splunk, a Cybersecurity Software Leader

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Cisco

In a groundbreaking move, tech giant Cisco has unveiled its intention to acquire Splunk, a renowned cybersecurity software company, in an all-cash transaction valued at approximately $28 billion. This momentous deal marks the largest acquisition in Cisco’s storied history and signals the company’s resolute commitment to expanding its cybersecurity portfolio.

Under the terms of the agreement, Cisco will acquire Splunk for $157 per share, representing a substantial premium to Splunk’s market value. Following the announcement of this acquisition, Splunk’s stock price surged by an impressive 21%, while Cisco’s shares experienced a modest decline of 4%.

Splunk’s core technology is focused on enabling businesses to monitor and analyze their data effectively, thereby mitigating the risks of cyberattacks and accelerating the resolution of technical issues.

Cisco, renowned as the world’s foremost manufacturer of computer networking equipment, has been strategically bolstering its cybersecurity division to meet evolving customer demands and drive sustainable growth.

Cisco and Splunk together to club artificial intelligence (AI) in Networks:

Cisco’s CEO, Chuck Robbins, has emphasized the pivotal role of artificial intelligence (AI) in safeguarding networks. He highlighted the powerful AI capabilities embedded in Splunk’s technology and articulated the vision of the combined entity: Our combined capabilities will drive the next generation of AI-enabled security and observability. From threat detection and response to threat and prevention, we will help to make organizations of all sizes more secure and safe.

Splunk
Splunk

This landmark acquisition is expected to conclude in the third quarter of 2024, with Cisco anticipating an improvement in gross margins in the first year and non-GAAP earnings enhancement in the second year.

Notably, the purchase price of approximately $28 billion represents roughly 13% of Cisco’s market capitalization—a significant commitment for a company that has historically shied away from blockbuster deals. Before the Splunk acquisition, Cisco’s most substantial acquisition was the $6.9 billion purchase of cable set-top box manufacturer Scientific Atlanta in 2006, when Cisco’s market cap was just over $100 billion.

In recent years, as the public cloud encroached on Cisco’s traditional back-end business, the company embarked on a quest to uncover new and robust revenue streams. Cybersecurity emerged as a pivotal focus area, leading to the transformation of its core switching and routing business, which was rebranded as “Secure, Agile Networks” in fiscal 2022.

This renaming underscored the importance of integrating security into networking infrastructure, resulting in a substantial revenue increase of 22% in the core business, reaching $29.1 billion in the fiscal year ending on July 29. The dedicated security unit also posted a commendable 4% growth, with sales totaling $3.9 billion.

Although Cisco’s shares have posted a modest 12% gain this year, they have underperformed in comparison to the tech-heavy Nasdaq index, which has surged by 27%. Over a five-year horizon, Cisco’s stock has seen only a 10% uptick, significantly lagging behind the Nasdaq’s remarkable 66% gain.

During a recent appearance on CNBC’s “Squawk on the Street,” CEO Chuck Robbins expressed his anticipation of organizational synergies materializing between Cisco and Splunk within the next 12 to 18 months.

He further elaborated on the financing structure of the acquisition, indicating that it would be funded through a combination of cash and debt.

Robbins elucidated, “Together, we will become one of the largest software companies globally,” underscoring the transformative nature of the merger.

Nevertheless, following the acquisition announcement, some analysts raised concerns about potential product overlap, regulatory scrutiny, and the price Cisco paid for Splunk. Ittai Kidron of Oppenheimer noted that Splunk’s transition to the cloud had been perceived as “underwhelming” by some in the industry.

Cisco

In recent years, Splunk has shifted its focus from an on-premises “customer-managed” approach to concentrate on cloud-oriented offerings. However, Splunk CEO Gary Steele, who is set to join Cisco’s executive team post-acquisition, stressed the continued importance of accommodating large customers who rely on customer-managed environments for their unique needs.

It’s worth noting that Gary Steele assumed leadership at Splunk just over a year ago, following his tenure as CEO of Proofpoint, a cybersecurity firm that was acquired by a private equity company Thoma Bravo for $12.3 billion in 2021.

To address contingencies, the agreement stipulates that if Cisco decides to withdraw from the deal or if it encounters regulatory roadblocks, it will be required to pay Splunk a termination fee of $1.48 billion. Conversely, if Splunk chooses to walk away from the transaction, it will incur a $1 billion breakup fee payable to Cisco.

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In 2023, Cisco had already embarked on a string of acquisitions, with a keen focus on security. These acquisitions included Armorblox, a threat detection platform; Oort, specializing in identity management; and Valtix and Lightspin, both prominent in the field of cloud security.

Legal advisors for this monumental deal included Tidal Partners, Simpson Thacher, and Cravath, Swaine & Moore representing Cisco, while Qatalyst Partners, Morgan Stanley, and Skadden, Arps, Slate, Meagher & Flom provided counsel to Splunk.

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