By Edward Mazin, Luca Cuffe, Agastya Jain, Lars Birkeland (UCLA),
Mikołaj Borowiak, and Argyro Charizona (Università Bocconi)
Photo: adi goldstein (unsplash)
Overview of the deal
Acquirer: Cisco
Target: Splunk
Implied Equity Value: $28bn
Total Transaction Size: Q3 2024
Acquirer advisor: Tidal Partners (financial), Simpson Thacher & Bartlett and
Latham & Watkins (legal)
Target advisor: Qatalyst Partners and Morgan Stanley (financial), Skadden, Arps, Slate, Meagher & Flom (legal)
Cisco Systems (CSCO.O) on Thursday agreed to buy cybersecurity firm Splunk (SPLK.O) for about $28 billion in its biggest-ever deal to strengthen its software business and capitalise on the boom in artificial intelligence. The transaction would be Cisco’s largest acquisition, surpassing the $6.9 billion purchase of the cable set-top box maker Scientific Atlanta in 2005 and the acquisition of a comparable size of the optical networking firm Cerent in 1999. Cisco plans to pay for the acquisition with a combination of cash and debt financing.
The acquisition, which at the same time is the biggest technology transaction of the year, will help to bring down Cisco's dependency on its massive networking equipment branch, which has suffered in recent years from disrupted supply chains and a post-pandemic slowdown on the demand side.
The acquisition has been unanimously approved by the boards of both companies. It is expected to close by the end of the third quarter of 2024, subject to regulatory approval and other customary closing conditions including approval by Splunk shareholders.
"Uniting with Cisco represents the next phase of Splunk's growth journey, accelerating our mission to help organizations worldwide become more resilient, while delivering immediate and compelling value to our shareholders," said Gary Steele, president and CEO of Splunk.
Company Details (Acquirer - Cisco)
Cisco is an American-based multinational digital communications technology conglomerate corporation that develops, manufactures, and sells networking hardware, software, telecommunications equipment, and other high-technology services and products. It specializes in specific tech markets, such as the Internet of Things (IoT), domain security, videoconferencing, and energy management with leading products including Webex, OpenDNS, Jabber, Duo Security, and Jasper.
Founded in 1984, headquartered in San Jose, California
CEO: Chuck Robbins
Number of employees: ~84,900 (as of 2023)
Market Cap: $218.6bn (as of 10/09/2023)
EV: $198.9bn
LTM Revenue: $57.0bn
LTM EBITDA: $17.2bn
LTM EV/Revenue: 3.5x
LTM EV/EBITDA: 11.4x
Company Details (Target - Splunk)
Splunk is engaged in the development and marketing of cloud services and licensed software solutions in the United States and internationally. The company offers security and observability platforms including Splunk Security and Splunk Observability. Splunk Security helps security leaders fortify their organization’s digital resilience by mitigating cyber risk. Splunk Observability provides visibility across the full stack of infrastructure, applications, and the digital customer experience.
Founded in 2003, headquartered in San Francisco, California
CEO: Gary Steele
Number of employees: ~8,000 (as of 2023)
Market Cap: $24.7bn (as of 10/06/2023)
EV: $26.3bn
LTM Revenue: $3,843.0mn
LTM EBITDA: $107.4mn
LTM EV/Revenue: 6.9x
LTM EV/EBITDA: 156.7x
Projections and Assumptions
Short-term consequences
Takeover of Splunk is designated to accelerate revenue growth and cause gross margin expansion at the acquirer (Cisco) in the first fiscal year after the close of the deal.
Cisco Chief Financial Officer (CFO), Scott Herren, announced that with respect to the previous firm’s M&A activities, the considerable equity value of the target company will not change the acquiring company’s current strategy that involves significant share buyback programs. The reason for that is the investment thesis that included Splunk’s immediate positive effect on cash flow generated by the enlarged corporate entity.
Although there is minimal product overlap between the two businesses in the very competitive market for security and observability software, the acquisition is still pending regulatory assessment in the United States and Europe. According to Herren, the evaluation procedure ought to be "relatively straightforward." Furthermore, the purchase won't be reviewed in China because of its little exposure there.
The United States accounts for around two thirds of Splunk's revenue, so having access to Cisco's global sales network should allow the company to expand into new areas and markets. He stated that Cisco does not anticipate the transaction to result in any large layoffs at Splunk.
Long-term Upsides
The $28 billion deal for Splunk is the largest buyout in Cisco’s rather acquisitive history. This deal is a display of Cisco’s ambition in bolstering their cyber security and observability platform. Cisco has long-held one of the biggest global data networks and hardware businesses, but the acquisition of Splunk provides an AI-enabled software component. This deal provides Cisco with increased exposure and market share to the Business Intelligence, AI, and Cyber Security industries. These are all rapidly growing markets with an expected 7%, 19%, and 9% CAGR respectively through 2032.
The primary rationale behind this deal can be attributed to the clear synergies between Cisco and Splunk. The combined capabilities of the companies within data and security results in an end-to-end data platform that will enhance digital resilience across hybrid and multi-cloud environments. The long-term goal of this acquisition is to help organizations move from threat detection and response to threat prediction and prevention.
From a financial perspective, Splunk’s integration can help improve Cisco’s growth and margin situation. From 2012-2022, Cisco’s revenue increased at a CAGR of 1.6%. Meanwhile, over the past 5 years, Splunk’s revenue grew at a CAGR of 22.8%, comfortably beating the Information Technology sector average of 8.3%. Additionally, taking on Splunk’s $4 billion annual recurring revenue will provide an instant revenue boost— which also has long-term growth potential. Moreover, with Splunk having more efficient gross margins than Cisco, it can be inferred that this acquisition should improve Cisco’s margins.
The expanding AI and software market has led Cisco to permeate into the space, and the acquisition of Splunk cements Cisco as a viable competitor in AI.
Risks and Uncertainties
Despite extensive due diligence conducted by Cisco, there are some risks associated with this transaction. The most likely challenge Cisco could face from its investment in Splunk is customer retention. Splunk has had pricing issues since transitioning to costly cloud systems in 2021— customers have historically found Splunk’s services overpriced but have not switched providers due to high switching costs. Surveys show customers are concerned about price hikes following the acquisition. Currently, 22% of customers say they are “Likely” or “Very Likely” to switch to Splunk’s competitors if the deal goes through. However, most large customers are fully prepared to pay more for Splunk if prices increase and have no plans to cease using its services.
On the pricing side, Analysts have expressed concerns that Cisco overpaid for Splunk. The agreed-upon $157 share price is significantly higher than Splunk’s 52-week low of $65 at the announcement date. However, the $157 figure, ~30% higher than the pre-announcement spot price, aligns with TTM revenue multiples of precedent transactions and is not cause for concern.
Cisco has little exposure to the risk of the transaction not closing. In a Yahoo Finance interview, Cisco CFO Scott Herren confirmed that Cisco’s product line has little overlap with Splunk’s and that strict Chinese regulators are not likely to have a significant effect on the transaction as Splunk does not have extensive business operations in the country.
Though there are many uncertainties with the Splunk acquisition, most of the risks from the transaction and operational sides have been mitigated.
"We're excited to bring Cisco and Splunk together. 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 organisations of all sizes more secure and resilient." - Chuck Robbins, Chair and CEO (Cisco)
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