Cisco drops $28 billion on Splunk acquisition

Cisco plans to bring on data mining and cybersecurity company Splunk for $28 billion, according to an announcement today.

This is Cisco's largest-ever acquisition and the latest in a string of cybersecurity-related acquisitions, according to CNBC. Splunk monitors and analyzes enterprise customer data to reduce the threat of security breaches and remediate threats. Cisco said the acquisition brings together two companies focused on AI, security and observability, further protecting enterprise data.

Splunk has over 15,000 customers, including Coca-Cola, Intel and Porsche, according to Reuters. Splunk's competitors include small pure-play startups as well as tech giants such as HP and IBM, according to analysts with Raymond James.

Before Splunk, Cisco's largest acquisition was that of Scientific Atlanta for about $7 billion, reported CNBC. Earlier this year, Cisco acquired cybersecurity companies Armorblox, Oort, Valtix and Lightspin.

The networking equipment giant plans to pay $157 per share in an all-cash deal for Splunk, about a 31% premium to Wednesday's closing price, reported Seeking Alpha. The deal will be financed by cash and debt.

Cisco's shares dropped nearly 4% after the announcement, while Splunk experienced a 21% boost in its shares this morning.

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Cisco CEO Chuck Robbins said this marks the company's latest effort to boost its AI business. "We've already taken half a billion dollars of orders for AI infrastructure," said Robbins on a conference call, according to Dow Jones. "There's also a huge opportunity with enterprises to help them responsibly unlock the opportunities that come with AI. Together, with our visibility into the data, the substantial scale we bring, and a deep foundation of trust, we are very well positioned to lead in this space."

After the acquisition, Splunk President and CEO Gary Steele will join Cisco's executive leadership team, reporting to CEO Chuck Robbins.

Cisco said "it expects to be cash flow positive and gross margin accretive in the first fiscal year after the deal closes, will help boost its recurring revenue," according to Seeking Alpha. In addition, the acquisition is forecast to add to adjusted earnings per share in the second year after the deal is finalized.

Acquisition met with mixed reviews

However, analysts had mixed reviews of the acquisition, noting possible product overlap, regulatory scrutiny and the high price Cisco paid for Splunk.

In a company brief, analysts at Raymond James said the deal should meet Cisco's targets for margin and cash accretion, but noted that "we would not consider [the acquisition] transformational."

"We see Splunk as a good strategic fit, and trust Cisco management regarding the cultural fit," said analysts for Raymond James. "Cisco has a stated strategy to increase its software and recurring revenue within the mix, and Splunk fits that vision. Splunk can add $4B of ARR to Cisco's recent $24B ARR. The deal valuation appears rich, which reduces the likelihood of other higher bidders, and this is generally our view of most Cisco acquisitions."

Raymond James analysts added that the Splunk acquisition delivers a "strategic fit" partly because "the customer base is likely complimentary; operating synergies could arguably be meaningful. We consider Cisco's channel an asset and advantage, and integrating Splunk could yield cost synergies."

Pinjalim Bora, CFA with J.P. Morgan, was optimistic in their acquisition analysis, stating that "Splunk's accomplishments have been remarkable" as a leader in machine log analytics.

"From our conversations with customers, we expect a long runway of growth given the company's evolving use cases and expanding platform, and we believe Splunk could become an indispensable mainstay within the modern enterprise if it continues to execute," reported Bora.

Cisco plans to wrap up the deal in Q3 of 2024, subject to regulatory and shareholder approvals.

Tidal Partners LLC was the financial advisor and Simpson Thacher & Bartlett LLP acted as legal counsel for Cisco.

Morgan Stanley and Qatalyst Partners are Splunk's financial advisors; Skadden, Arps, Slate, Meagher & Flom LLP served as legal counsel.