Cisco Systems has announced its acquisition of cybersecurity firm Splunk for approximately $28 billion. This deal marks Cisco’s largest-ever acquisition and aims to strengthen its software business and take advantage of the growing use of artificial intelligence. The purchase will help reduce Cisco’s reliance on its networking equipment business, which has faced challenges due to supply chain issues and a slowdown in demand following the pandemic.
Under the agreement, Cisco will pay $157 in cash for each share of Splunk, representing a 31% premium to the company’s last closing price. Following the announcement, Splunk shares surged 23% but Cisco’s stock dropped nearly 5%.
The joint statement from both companies highlighted that the combination of Cisco and Splunk will create one of the world’s largest software companies and accelerate Cisco’s transformation towards a more recurring revenue model. It is worth noting that Cisco and Splunk already have a data-security partnership, and Splunk boasts a customer base of over 15,000 companies, including Coca-Cola, Intel, and Porsche.
Splunk experienced significant revenue growth of nearly 40% last year but has faced challenges in 2023 due to an industry-wide slowdown caused by rising interest rates and inflation. However, the acquisition by Cisco is expected to accelerate revenue growth and gross margin expansion for Cisco in the first fiscal year after the deal’s completion.
This is not the first time Cisco has pursued Splunk. In 2022, Cisco made a more than $20 billion offer for the company, but the deal fell through. The recent acquisition is seen as a win for both parties, providing Cisco with an advantage in AI-enabled security.
While the deal presents opportunities, there may also be challenges. The overlap in the security business could attract antitrust scrutiny, and concerns have been raised about Splunk’s transition to the cloud being “underwhelming.”
The acquisition has received unanimous approval from the boards of both Cisco and Splunk and is expected to close by the end of the third quarter of 2024, pending regulatory approvals. Notably, the deal does not require approval from China. If the deal does not proceed, Cisco will be obligated to pay a termination fee of $1.48 billion.
Tidal Partners, Simpson Thacher & Bartlett, and Cravath, Swaine & Moore served as advisers to Cisco, while Qatalyst Partners, Morgan Stanley & Co, and Skadden, Arps, Slate, Meagher & Flom advised Splunk.
In summary, Cisco’s acquisition of Splunk aims to bolster its software business and capitalize on the growing use of artificial intelligence. The deal will reduce Cisco’s reliance on its networking equipment business and create one of the world’s largest software companies. While challenges and potential antitrust scrutiny exist, the acquisition is expected to drive revenue growth and gross margin expansion for Cisco. The deal is set to close by the end of the third quarter of 2024, subject to regulatory approvals.
