Networking equipment giant Cisco is set to acquire cybersecurity software firm Splunk for a cash deal valued at approximately $28 billion. This move marks Cisco’s largest acquisition to date.
Splunk specializes in helping businesses monitor and analyse their data, enabling them to mitigate hacking risks and resolve technical issues more efficiently. While Splunk shares surged by 21% in response to the announcement, Cisco’s shares experienced a 4% drop.
Cisco’s CEO, Chuck Robbins, highlighted the significance of artificial intelligence in cybersecurity, emphasizing the power of AI within Splunk’s technology to enhance network protection. He stated, “Our combined capabilities will drive the next generation of AI-enabled security and observability. From threat detection and response to threat prediction and prevention, we will help make organizations of all sizes more secure and resilient.”
The acquisition is anticipated to conclude in the third quarter of 2024, with Cisco expecting improvements in gross margins within the first year and non-GAAP earnings within the second year.
This purchase amounts to roughly 13% of Cisco’s market capitalization, marking a significant shift for the company, which has traditionally steered clear of blockbuster acquisitions. Prior to Splunk, Cisco’s most substantial deal was its $6.9 billion acquisition of cable set-top box manufacturer Scientific Atlanta in 2006, when the company’s market cap was just over $100 billion.
However, as the public cloud has increasingly encroached upon Cisco’s traditional back-end business, the company has sought new, substantial sources of revenue, with a primary focus on cybersecurity.
In the fiscal year 2022, Cisco rebranded its core switching and routing business from Infrastructure Platforms to Secure, Agile Networks, emphasizing the integration of security into networking equipment. The company also established a separate reporting unit called End-to-End Security, dedicated exclusively to security products. Consequently, revenue in the core business surged by 22% to $29.1 billion in the fiscal year ending July 29, while the security unit achieved a 4% increase, totalling $3.9 billion in sales.
Despite these strategic moves, Cisco shares have underperformed the Nasdaq, with a 12% rise compared to the tech-heavy index’s 27% increase this year. Over the past five years, Cisco’s stock performance has lagged even further behind the broader sector, with a mere 10% gain compared to the Nasdaq’s impressive 66% growth.
Cisco’s CEO, Robbins, anticipates that organizational synergies between Cisco and Splunk will become evident within the next 12 to 18 months. The company intends to finance the acquisition through a combination of cash and debt.
However, some analysts have voiced concerns regarding potential product overlap, regulatory scrutiny, and the price paid by Cisco. Ittai Kidron of Oppenheimer noted that Splunk’s transition to the cloud has been “underwhelming.”
In recent years, Splunk shifted its focus from an on-premises “customer-managed” approach to prioritize cloud-based offerings. Gary Steele, CEO of Splunk, who will join Cisco’s executive team post-acquisition, acknowledged that many large customers still rely on the capabilities offered in a customer-managed environment.
Should the deal fall through or be blocked by regulators, Cisco will be obligated to pay Splunk a termination fee of $1.48 billion, as stated in regulatory filings. Conversely, if Splunk decides to abandon the deal, it will be required to pay a $1 billion breakup fee to Cisco.
In 2023, Cisco acquired four security-focused companies: Armorblox (a threat detection platform), Oort (specializing in identity management), and Valtix and Lightspin (both in cloud security).
Tidal Partners, Simpson Thacher, and Cravath, Swaine & Moore advised Cisco on the acquisition, while Qatalyst Partners, Morgan Stanley, and Skadden, Arps, Slate, Meagher & Flom advised Splunk.