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Cisco Systems has announced its acquisition of cybersecurity firm Splunk in a landmark deal valued at approximately $28 billion. This significant move represents Cisco’s largest-ever acquisition and aims to bolster its software business while capitalizing on the thriving field of artificial intelligence.
The acquisition holds strategic importance for Cisco as it seeks to diversify its revenue streams and reduce its reliance on its vast networking equipment business, which has faced challenges in recent years due to supply chain disruptions and a post-pandemic slowdown in demand.
Chuck Robbins, CEO of Cisco, expressed confidence in the merger, emphasizing the alignment of both companies in the critical areas of security and observability. He stated that these domains are of paramount importance to customers, making them less likely to cut spending in these areas.
In recent years, Cisco has been actively transitioning away from its traditional hardware-focused approach and has instead prioritized investments in software and services through strategic acquisitions.
Splunk is renowned for its expertise in data observability, helping organizations monitor their systems for cybersecurity threats and other potential risks. The company operates on a subscription-based pricing model for its customers.
While Cisco and Splunk have engaged in merger discussions in the past that ultimately faltered, this deal marks a significant milestone in their partnership.
The acquisition entails Cisco offering $157 in cash for each share of Splunk, representing a 31% premium over the company’s last closing price. However, Splunk’s shares were trading slightly below the offer price at $145.04, reflecting some uncertainty regarding regulatory scrutiny. Cisco’s shares experienced a 4% decline.
Cisco, headquartered in San Jose, California, already maintains a data security partnership with Splunk, whose extensive client base includes prominent companies such as Coca-Cola (KO.N), Intel (INTC.O), and Porsche.
Splunk experienced robust revenue growth of nearly 40% last year but has encountered an industry-wide demand slowdown in 2023, partly driven by rising interest rates and persistent inflation.
Both companies anticipate that the acquisition will drive revenue growth and expand gross margins at Cisco in the first fiscal year following the deal’s closure.
While some analysts have raised concerns about potential antitrust scrutiny due to the overlap in the security business, Cisco remains confident that the acquisition will not face significant regulatory hurdles. Cisco’s CEO, Chuck Robbins, pointed out that the integration of the two companies is synergistic, with limited technology overlap, alleviating concerns about competition.
The acquisition, which received unanimous approval from the boards of both Cisco and Splunk, is expected to be finalized by the end of the third quarter of 2024, pending regulatory approvals. It will not require approval from Chinese regulators. The deal is projected to be cash-positive and is set to contribute $4 billion in annual recurring revenue, as stated during a conference call with analysts.
In the event of the deal being canceled, Cisco would be obligated to pay Splunk a termination fee of $1.48 billion.
Key advisory firms for the acquisition included Tidal Partners, Simpson Thacher & Bartlett, and Cravath, Swaine & Moore LLP for Cisco, while Qatalyst Partners, Morgan Stanley, and Skadden, Arps, Slate, Meagher & Flom LLP advised Splunk.
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