San Jose, CA-headquartered Cisco Systems, Inc. has reportedly offered $20 billion-plus to acquire data analytics giant Splunk. The offer exceeds Splunk’s current market capitalization by $2 billion, but reports indicate the two companies haven’t discussed it yet.
Cisco’s offer comes when Splunk is actively hunting for a new CEO following former president and CEO Doug Merritt’s departure in November 2021. Graham V. Smith, the chairman of Splunk’s board, is currently serving as interim CEO to fill the leadership void. He is best known in the industry for his stint as the chief financial officer and later executive vice president at Salesforce.
Cisco’s $20 billion acquisition offer, which is $13 billion more than its highest acquisition ever, comes after the company announcedOpens a new window a 17% rise in net income and a 6% rise in revenue in Q2 2022 against Q2 2021. “We continue to see incredibly strong demand across our portfolio, emphasizing the criticality and relevance of Cisco’s innovation. Our robust order strength, record backlog and double-digit growth in annual recurring revenue position us well to deliver growth,†said Chuck Robbins, chair and CEO of Cisco.
According to The Wall Street Journal, which broke the news on February 11, the two companies haven’t gotten around to discussing the acquisition yet. However, Splunk’s investors reacted positively to the news, with the company’s stock price jumping 9% on the morning of February 14. It has remained stable since at around $122 per share.
The positive reaction from investors has some logic to it. Splunk’s stock price fell 20% over a six-month period, and the company reportedOpens a new window a GAAP operating loss of $780 million in 2021. Even though its cloud revenues zoomed 77% in the year, its overall revenue was down 5% year-over-year, and its operating cash flow was “negative $191 million with free cash flow of negative $228 million.†The acquisition by Cisco could provide much-needed breathing space for the company to invest heavily in cloud, IT security, and data observability platforms and digital transformation initiatives in the year ahead.
Though the two companies didn’t react to the rumors for a few days after they surfaced, Chuck Robbins, Cisco’s chairman and CEO, confirmed the developments during its Q2 earnings call. “We are constantly evaluating potential opportunities. For every deal we do, we probably look at 10-15 companies. We base our decisions on strategic fit, cultural fit, and equally as important, the financial and evaluation fit,†he said when questioned about the potential acquisition.
With the Acquisition Bode Well for Cisco?Â
Cisco’s planned acquisition of Splunk has received favorable reactions from industry analysts. Investment advisory firm The Motley Fool said the acquisition “would make a lot of strategic sense for Cisco, which has aimed to move beyond its historical emphasis on hardware to incorporate more software and services offerings.â€Â
According to Futurum Research, the deal would be a good fitOpens a new window for both companies. “As I see it, Splunk’s presence in the security and observability space would be an incredibly attractive addition to Cisco’s existing solutions, while adding a substantial cloud and recurring revenue-based business to the company’s top line,†said Daniel Newman, Futurum’s principal analyst.
According to Newman, Splunk underwent a rough phase in 2021, losing its CEO and witnessing its stock price taking a tumble, but the company still packs a punch and offers a lot of value to potential buyers. “The company has been pivoting to a recurring revenue model by shifting from traditional software licenses to cloud-based subscriptions while also steadily growing the customer base. This growth and its corner on a key market segment continue to make Splunk an attractive acquisition for Cisco,†he said.
As for Cisco, Newman said the company made significant investments in cloud, software, and other higher-margin offerings, and the Splunk deal could help it achieve further growth in these bitterly-contested verticals. “As I see it, Splunk’s presence in the security and observability space would be an incredibly attractive addition to Cisco’s existing solutions, while adding a substantial cloud and recurring revenue-based business to the company’s top line.â€
In a note to investors, Morgan Stanley analyst Meta Marshall said the Splunk acquisition would help Cisco offer stiff competition to industry leaders in the cybersecurity space. The deal, she said, will further strengthen Cisco’s foothold in the security and analytics space, especially in Extended Detection and Response (XDR).Â
“With dominant position in multiple on-premise markets, Cisco’s valuation has been held back by more gradual moves toward the cloud and the revenue transition from opex vs. capex focused IT. A challenge for Cisco in its transformation is the heft of the current $50 billion revenue base focused primarily on networking equipment, making it mathematically difficult to find the subscription revenues to transform the business,†she said. She added that the acquisition of Splunk will help Cisco achieve growth in this segment. She, however, added a word of caution.
“While Meraki, Sourcefire, OpenDNS, Acacia have been well-executed acquisitions, AppDynamics has stood out as a pure-play software acquisition that has not performed well (with AppDynamics revenue down Y/Y in some recent quarters).Â
“The ongoing business model transition and growing competition at Splunk could present additional challenges for Cisco if they pursued this acquisition. However, an ability to package Splunk’s leading Security analytics and ITOM solutions with other security offerings, further optimize distribution and pricing, could present very interesting potential M&A synergies for Cisco,†Marshall added.
Cisco’s Bold Move to Boost Cybersecurity M&As in 2022
Sapana Maheria, practice head of Thematic Research at GlobalData, believes that if the acquisition goes through, it will bode wellOpens a new window for further big-ticket mergers and acquisitions in the cybersecurity sector in the year ahead, especially in the behavioral analytics space. It will also affirm Cisco’s projected dominance in the sector in the years ahead.
“Cisco’s acquisition offer shows us that cybersecurity will continue to be a key driver of mergers and acquisitions (M&A) in 2022. If the deal goes through, Cisco is expected to gain a dominant position in the enterprise security market,†she said. In GlobalData’s thematic scorecard for application software, Splunk ranked fifth out of 45 companies, and the company also boasts a score of 5 out of 5 in the cybersecurity theme. These rankings reflect its credentials and dominance in the space.
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