In its largest-ever transaction, Cisco Systems (CSCO.O) on Thursday decided to acquire cybersecurity company Splunk (SPLK.O) for nearly $28 billion in order to grow its software division and take advantage of the rise in artificial intelligence.
The largest technology transaction of the year, the agreement will lessen Cisco’s reliance on its sizable networking equipment business, which has recently been plagued by supply chain problems and a slump in demand following the pandemic.
“The thing that gives you conviction is we’re bringing together two companies within security as well as observability, which are two of the most significant areas for our customers and areas where they’re unlikely to cut spending in – just due to the criticality of those threats,” Cisco CEO Chuck Robbins informed Reuters in an interview.
Through partnerships, Cisco has increased its stakes in software and services while attempting to lessen its dependency on hardware over the years.
Splunk is renowned for its capabilities in the field of data observability, which aids businesses in monitoring their systems for threats and potential cybersecurity issues. Customers are charged according to a subscription-based pricing plan by the business.
Reuters has previously reported that the two businesses have previously engaged in merger talks that failed.
Each share of Splunk was offered by Cisco for $157 in cash, a 31% premium to the stock’s most recent closing price.
Splunk’s shares were trading more than 21% higher at $145.04, which was less than the offer price of $157. This indicates some hesitancy over regulatory review. Shares of Cisco decreased by 4%.
Based in San Jose, California Splunk, whose more than 15,000 clients include many illustrious firms including Coca-Cola (KO.N), Intel (INTC.O), Porsche, and Cisco already has a data-security agreement.
Splunk has struggled with an industry-wide downturn in demand in 2023 brought on by higher interest rates and persistent inflation after experiencing a rise in sales growth to almost 40% last year.
According to the firms, its acquisition will hasten Cisco’s revenue growth and gross margin increase in the first fiscal year following the deal’s closing.
“Cisco paid a fair price for a good synergistic business. Both parties benefit from it, according to Thomas Hayes, head of the hedge fund Great Hill Capital. “Cisco will now have a competitive advantage in AI-enabled security,”
Although Cisco has completed significant purchases in the past, the acquisition of Splunk is by far the largest in its almost 40-year history. Cisco purchased the TV software company NDS for $5 billion in 2012, and AppDynamics Inc., a provider of enterprise software, for around $3.7 billion in 2017.
Anti-Trust Inspection
However, Cisco stated that it was unconcerned about the purchase encountering significant regulatory obstacles. Some experts claimed that the overlap in the security industry could bring antitrust scrutiny.
There is little concern about this being some sort of roll-up that will stifle competition because the two companies joining forces are quite synergistic and there is no history of (antitrust) challenges in the U.S., according to Robbins, speaking to Reuters.
Subject to regulatory approvals, the merger between Cisco and Splunk is anticipated to close by the end of the third quarter of 2024. Both boards of directors unanimously authorized the merger. Regulators in China won’t need to approve it. On a conference call with analysts, Cisco officials stated that the transaction is anticipated to be cash-positive and to contribute $4 billion in annual recurring revenue.
Splunk will receive a $1.48 billion termination fee from Cisco if the agreement is abandoned.
In addition to Cravath, Swaine & Moore LLP, Tidal Partners, and Simpson Thacher & Bartlett also provided advice to Cisco. Splunk received advice from Morgan Stanley, Qatalyst Partners, and Skadden, Arps, Slate, Meagher & Flom LLP.