In a landmark move that has sent shockwaves through the tech and cybersecurity industries, Cisco Systems has unveiled its largest-ever acquisition, agreeing to purchase cybersecurity firm Splunk for a staggering $28 billion. This strategic decision underscores Cisco’s commitment to fortifying its software business while tapping into the burgeoning demand for artificial intelligence.
The acquisition, labeled the biggest technology transaction of the year, not only solidifies Cisco’s position in the tech world but also marks a significant shift in the company’s strategy. It’s aimed at reducing Cisco’s reliance on its sprawling networking equipment business, which has faced substantial challenges in recent times, including supply chain disruptions and a post-pandemic dip in demand.
Chuck Robbins, the CEO of Cisco, expressed his confidence in this transformative deal, highlighting the synergy between the two companies in the crucial domains of security and observability. These are areas where customers are unlikely to cut spending due to the ever-present criticality of addressing emerging threats.
Under Robbins’ leadership, Cisco has been on a journey to pivot away from traditional hardware and pivot toward software and services. This monumental acquisition further cements this strategic direction.
Splunk, renowned for its expertise in data observability, empowers companies to monitor their systems for cybersecurity risks and other threats. It operates on a subscription-based pricing model, which has resonated with a wide range of customers.
This deal is not the first time Cisco and Splunk have explored the possibility of coming together. Past discussions did not yield a partnership, but this time, they have succeeded. Cisco has offered $157 in cash for each share of Splunk, representing a substantial 31% premium over Splunk’s last closing price.
The immediate market reaction was telling. Splunk’s shares surged by more than 21% to $145.04, although they remained below the offer price of $157. This indicates some apprehension regarding regulatory scrutiny. On the flip side, Cisco’s shares experienced a 4% dip.
Cisco, headquartered in San Jose, California, already boasts a data-security partnership with Splunk. Splunk’s impressive roster of over 15,000 customers includes industry giants such as Coca-Cola, Intel, and Porsche.
Despite enjoying a remarkable surge in revenue growth, approaching nearly 40% in the previous year, Splunk has had to grapple with an industry-wide slowdown in demand in 2023. This downturn has been primarily attributed to rising interest rates and persistent inflation. Cisco anticipates that the acquisition will reignite revenue growth and bolster gross margins in the first fiscal year following the deal’s closure.
Industry experts are taking notice of this historic acquisition, acknowledging its potential to position Cisco as a leader in AI-enabled security. While Cisco has executed significant acquisitions in the past, this acquisition of Splunk is by far the largest in its nearly four-decade history. Notable previous acquisitions include the $5 billion purchase of TV software company NDS in 2012 and the approximately $3.7 billion acquisition of business software firm AppDynamics Inc in 2017.
The overlap between Cisco and Splunk in the security business has raised concerns about potential antitrust scrutiny. However, Cisco remains confident that the deal will not face insurmountable regulatory hurdles. The acquisition has received unanimous approval from the boards of both Cisco and Splunk, with plans for it to conclude by the end of the third quarter of 2024, contingent upon regulatory approvals. Importantly, it does not require approval from Chinese regulators. Cisco executives predict that the deal will not only be cash-positive but will also contribute an impressive $4 billion in annual recurring revenue.
In a provision that underscores the commitment to this transformational acquisition, Cisco has agreed to pay Splunk a termination fee of $1.48 billion if the deal is shelved.
Advising Cisco in this landmark deal were Tidal Partners, Simpson Thacher & Bartlett, and Cravath, Swaine & Moore LLP. On the Splunk side, Qatalyst Partners, Morgan Stanley, and Skadden, Arps, Slate, Meagher & Flom LLP provided guidance.
The acquisition of Splunk signifies a bold step for Cisco, one that will reshape the tech landscape and fortify its position as a powerhouse in the world of cybersecurity and artificial intelligence. As this blockbuster deal unfolds, the industry eagerly awaits the potential innovations and advancements it may bring.
