Cisco's Historic $28 Billion Acquisition of Splunk in Cash

In a monumental move, Cisco is set to acquire cybersecurity powerhouse Splunk for $28 billion in a cash transaction, marking the company's most significant acquisition to date. The announcement sent shockwaves through the industry, with Splunk shares surging by 21%, while Cisco shares experienced a 4% decline.

Splunk is renowned for its cutting-edge technology that enables businesses to monitor and analyze their data, fortifying their defenses against potential hacks and streamlining issue resolution. As the world's leading provider of computer networking equipment, Cisco has been strategically bolstering its cybersecurity division to meet the evolving demands of its customers and to foster growth.

Cisco's CEO, Chuck Robbins, has underscored the pivotal role of artificial intelligence (AI) in safeguarding networks. He emphasized the potential synergy between Cisco and Splunk's AI capabilities, stating, "Our combined capabilities will drive the next generation of AI-enabled security and observability. From danger discovery and reaction to danger expectation and avoidance, we will assist with making associations of all sizes safer and stronger.

The deal is anticipated to be finalized in the third quarter of 2024 and is expected to enhance gross margins in the first year, with non-GAAP earnings seeing improvement in the second year. This acquisition amounts to approximately 13% of Cisco's market capitalization, a substantial figure for a company historically known for avoiding blockbuster deals. Before Splunk, Cisco's most prominent acquisition was the $6.9 billion purchase of cable set-top box manufacturer Scientific Atlanta in 2006, when Cisco's market cap was just over $100 billion.

However, as the public cloud increasingly encroached on Cisco's traditional back-end business, the company needed to diversify its revenue streams, with cybersecurity being its primary focus. In fiscal year 2022, Cisco rebranded its core switching and routing business to "Secure, Agile Networks," highlighting the importance of integrating security into networking infrastructure. The company also established a dedicated reporting unit called "End-to-End Security," focused exclusively on security products. This strategic shift resulted in a 22% revenue increase in the core business, reaching $29.1 billion, while the security unit saw sales rise by 4% to $3.9 billion.

Cisco's stock performance has lagged behind the Nasdaq this year, rising only 12% compared to the tech-heavy index's 27% gain. Over the past five years, Cisco's stock has shown even more modest growth, up by about 10%, trailing the Nasdaq's impressive 66% surge.

Robbins anticipates that organizational synergies between Cisco and Splunk will become evident within 12 to 18 months. The acquisition will be financed through a combination of cash and debt, according to Robbins, who declared during a conference call with analysts, "Together, we will become one of the largest software companies globally."

Despite the excitement surrounding the deal, some analysts have raised concerns about potential product overlap, regulatory scrutiny, and the price Cisco paid for Splunk. Ittai Kidron of Oppenheimer pointed out that Splunk's transition to the cloud had been "underwhelming" in recent years, as the company shifted its focus from an on-premises "customer-managed" approach to a cloud-oriented offering.

Following the acquisition's completion, Splunk CEO Gary Steele will join Cisco's executive team. Steele took the helm at Splunk just over a year ago, having previously served as the CEO of Proofpoint, a cybersecurity firm acquired by private equity firm Thoma Bravo in 2021 for $12.3 billion.

In the event that Cisco withdraws from the deal or if regulatory obstacles arise, Cisco will be required to pay Splunk a termination fee of $1.48 billion, as outlined in a regulatory filing. Conversely, should Splunk opt to walk away from the deal, it will incur a $1 billion breakup fee payable to Cisco.

In 2023 alone, Cisco has made significant acquisitions in the cybersecurity realm, including Armorblox (a threat detection platform), Oort (identity management), Valtix, and Lightspin (both specializing in cloud security).

The acquisition was advised by Tidal Partners, Simpson Thacher, and Cravath, Swaine & Moore for Cisco, while Qatalyst Partners, Morgan Stanley, and Skadden, Arps, Slate, Meagher & Flom represented Splunk in the transaction.

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