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Cisco’s $28bn acquisition of Splunk

Acquisition Overview

Cisco (NASDAQ: CSCO), one of the world’s leading networking and telecommunications technology companies, is to acquire the data analysis and cybersecurity firm Splunk (NASDAQ: SPLK) in a deal worth over $28bn. The key strategic reasons for this deal stem from the expanding threat surfaces observed in recent months and Cisco’s growing emphasis on the cloud computing space. Splunk, as a company that specialises in analysing machine-generated data and providing insights based on this data, has found a vast array for applications of its skillset in the cybersecurity field.


Deal Structure

A striking feature of this deal is the cash-only nature of the deal; the agreement is to purchase all shares of Splunk at a rate of $157 in cash per share. The deal is expected to close by the end of Q3 in 2024, subject to regulatory approval. Cisco itself will finance the deal using a combination of both cash and debt. The price paid by Cisco represents a 30% premium on Splunk’s current market capitalisation – this reflects expectations of large rises in Splunk’s profit margins in the coming years. Splunk’s President and CEO, Gary Steele, will join Cisco’s Executive Leadership Team reporting to Chair and CEO Chuck Robbins.


Tidal Partners LLC are acting as financial advisors to Cisco, while Qataylst Partners and Morgan Stanley & Co. LLC are acting as financial advisors to Splunk.


Cisco Overview

Founded in 1984 by Leonard Bosack and Sandy Lerner, two Stanford University computer scientists, Cisco has grown to a world-leading digital communications technology firm. It has evolved to have a significant presence in the networking, telecommunications, IoT and videoconferencing fields. Being headquartered in San Jose, the company benefits from its close proximity to Silicon Valley, which grants it access to leading minds in the technology sector. The firm operates throughout the Americas, EMEA and APJC. This need to cater to global markets is reflected by its large 41000-strong workforce.


Date Founded: 1984


Number of employees: 41,163


EV: $191.09bn


LTM Revenue: $57bn


LTM EBITDA: $17.22bn


Market Capitalisation: $208.85bn


Splunk Overview

Splunk is an American software company that specialises in the analysis of machine-generated data. Its software processes this data and allows users to generate insights, graphs, and visualisations – this has widespread applications, particularly in diagnosing problems and in cybersecurity. In recent years, the firm has harnessed artificial intelligence to identify key risks and detect threats. Splunk is headquartered in San Francisco and has over 7000 employees.


Date Founded: 2003


Number of employees: 7,500


EV: $26.42bn


LTM Revenue: $3.84bn


LTM EBITDA: $107.36mn


Market Capitalisation: $24.80bn


Industry Insight


The increasing importance of cybersecurity is a major reason for this acquisition. As a leader in the cloud-computing and networking sector, which has faced major cyberattacks over the last few years, cybersecurity is a rapidly-increasing priority for clients – McKinsey has projected that damage from cyberattacks will cost about $10.5 trillion annually by 2025, a 4x increase from 2015. One notable attack was that on American TV provider Dish Network, which saw confidential details on more than 300,000 of its employees hacked into. Governments have also begun to legislate towards further mandatory measures for companies to take to ensure the security of their data.


One other key factor to consider is the advancements in artificial intelligence, as well as the potential that is held for further developments in this field. AI-driven cybersecurity tools can analyse massive datasets extremely quickly and efficiently, allowing for the rapid detection of threats and anomalies. Furthermore, these programs will work very well with machine-generated data, where the information is of a lot more uniform and predictable nature than human-generated data.


Finally, the uncertain macroeconomic conditions mean that large established firms are looking to increasing their ARR (annual recurring revenue). This is a metric of predictable and recurring revenue that provides firms with greater certainty and less vulnerability to volatility in the markets. This is especially true for technology firms, which have historically had extremely volatile share prices, particularly in times of economic uncertainty.


Strategic Rationale


Over the past few years, cybersecurity has steadily ascended on Cisco’s list of priorities. One main reason for this is that security is a natural extension of their market-leading networking business – with a client base that spans the entire world and most industries, security is incredibly important for Cisco’s clients and thus for the company itself. This can be seen in the growth of Cisco’s own security segment, called ‘End-to-End Security’, which consists specifically of security products, with revenue accounting for roughly 7% of total sales last year. One further reason for cybersecurity increasing in importance for Cisco is its own move away from a hardware-focused business into one that concentrates on cloud-based services, which face their own set of unique challenges that come with storing vast amounts of data on servers across the world.


The decision to acquire Splunk can also be attributed to the need for Cisco to increase its recurring revenue base. Splunk comes with an estimated $3.7bn in recurring revenue every year alone. Cisco CEO Chuck Robbins himself has emphasised how important this is to the firm, with recurring revenue rising to 44% of the firm’s total revenue over his time at the top of the company. Higher recurring revenue increases the financial security of the firm’s future, especially moving into times of volatile market movement.


A significant factor that likely influenced Splunk’s decision to agree to the acquisition is the ownership structure. In recent years, the ownership of Splunk has seen a notable shift, with increased stakes held by activist investors, venture capital funds, and private equity funds. These investors have actively engaged with Splunk, aiming to drive the company towards financial improvement by transitioning from selling licenses to recurring subscriptions. The all-cash nature of the proposed deal is particularly appealing to these investors since it eliminates the need for them to assume additional risk through debt or equity offerings as part of the acquisition.


Long Term Prospects


Overall, Cisco’s decision to acquire Splunk appears to be a strategically sound move in their quest to solidify their leadership in the cloud computing industry. The two companies appear to have similar working cultures, and their respective specialties complement each other well. Furthermore, Splunk is in excellent financial health, and its recent transition into a subscription-based business model aligns seamlessly with Cisco’s long-term objective to improve its own recurring revenue. This move also underscores Cisco’s willingness and proactivity in improving its own cybersecurity capabilities, given the importance that this field will hold in the coming years.


Written by Harish Raghu (Brasenose College)

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