Cisco's $28 Billion Acquisition of Splunk: Powering Up in the AI and Cybersecurity Arena

 

Cisco's $28 Billion Acquisition of Splunk: Powering Up in the AI and Cybersecurity Arena

On September 21, in a landmark move to bolster its software business and tap into the growing demand for artificial intelligence, Cisco Systems (CSCO.O) announced its acquisition of cybersecurity firm Splunk (SPLK.O) for approximately $28 billion. This mega-deal marks Cisco's largest-ever acquisition and aims to reduce the company's reliance on its extensive networking equipment business, which has faced challenges in recent years due to supply chain disruptions and a slowdown in demand post-pandemic.

Cisco's offer of $157 in cash per share of Splunk represents a substantial 31% premium over the latter's last closing price. Splunk's stock surged by 23%, coming within $9 of the offer price, while Cisco experienced a nearly 5% dip in its stock value following the announcement.

In a joint statement, both companies highlighted that their collaboration would position them as one of the world's leading software companies and expedite Cisco's shift toward a more recurring revenue model. Cisco already has an existing data-security partnership with Splunk, whose impressive client roster boasts prominent names like Coca-Cola (KO.N), Intel (INTC.O), and Porsche.

Splunk enjoyed a remarkable revenue growth surge of nearly 40% in the previous year. However, in 2023, it faced industry-wide challenges, including rising interest rates and persistent inflation, leading to a slowdown in demand. The acquisition is anticipated to drive revenue growth and gross margin expansion for Cisco, a company that traditionally relies on hardware sales, in the first fiscal year post-closure.

It's worth noting that Cisco had previously attempted to acquire Splunk for over $20 billion in 2022, an effort that ultimately fell through, as reported by the Wall Street Journal. Hedge fund Great Hill Capital's Chairman, Thomas Hayes, lauded this acquisition, describing it as a strategically sound move, providing Cisco with a competitive edge in AI-enabled security.

However, some concerns have been raised regarding potential antitrust scrutiny due to the overlap in their security businesses. Additionally, there are reservations about Splunk's transition to the cloud, which has been deemed as "underwhelming" by certain analysts.

The acquisition, unanimously approved by the boards of both Cisco and Splunk, is expected to conclude by the end of the third quarter in 2024, pending regulatory approvals. Notably, it will not require approval from China.

In the event the deal does not materialize, Cisco would be liable to pay a termination fee amounting to $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.