Cisco buys cybersecurity company Splunk for $28 billion

Sept 21 (Reuters) – Cisco Systems Inc (CSCO.O) agreed on Thursday to buy cybersecurity company SPLK.O for about $28 billion in its biggest deal ever to boost its software business and capitalize on the boom in artificial intelligence.

The deal, the largest technology deal of the year, will help reduce Cisco’s reliance on its massive networking equipment business, which has suffered in recent years from supply chain issues and a slowdown in demand after the pandemic.

“The thing that gives you conviction is that we’re bringing together two businesses around security and observability, which are some of the most important areas for our customers and areas where they’re unlikely to reduce spending — just because of the seriousness of these threats,” Cisco CEO Chuck Robbins told Reuters in an interview.

Under Robbins, Cisco has over the years tried to reduce its traditional reliance on hardware and double down on its bets on software and services through deals.

Splunk is known for its strengths in data observability, which helps companies monitor their systems for cybersecurity risks and other threats. The company operates a subscription-based pricing model for customers.

Reuters previously reported that the two companies had held merger talks in the past, but those discussions collapsed.

Cisco offered $157 in cash for each Splunk share, representing a 31% premium to the company’s last closing price.

Splunk shares were trading up more than 21% at $145.04, below the offer price of $157, reflecting some uncertainty about regulatory scrutiny. Cisco shares fell 4%.

San Jose, California-based Cisco already has a data security partnership with Splunk, whose more than 15,000 customers include prominent companies such as Coca-Cola (KO.N), Intel (INTC.O) and Porsche.

After revenue growth last year soared to nearly 40%, Splunk faces an industry-wide slowdown in demand in 2023 due to rising interest rates and flat inflation.

The acquisition will accelerate revenue growth and expand Cisco’s gross margin in the first fiscal year after the deal closes, according to the companies.

“Cisco bought a good synergistic business at a good price,” said Thomas Hayes, head of hedge fund Great Hill Capital. “It’s a win-win.” “This will give Cisco an advantage moving forward in AI-powered security.”

While Cisco has made large acquisitions in the past, its acquisition of Splunk is the largest in its nearly 40-year history. In 2012, Cisco bought TV software company NDS for $5 billion, while in 2017 it bought business software company AppDynamics Inc for about $3.7 billion.

Antitrust audit

Some analysts said the overlap in security businesses could invite antitrust scrutiny, but Cisco said it was not concerned about the deal, which faces significant regulatory hurdles.

“We don’t have any history of facing (antitrust) challenges in the United States, and the two companies coming together is quite synergistic — in technology integration there’s not a lot of overlap, so there’s not a lot of concern about that.” “Some kind of rolling would stop the competition,” Robins told Reuters.

The transaction, which was unanimously approved by the Board of Directors of both Cisco and Splunk, is expected to close by the end of the third quarter of 2024, subject to regulatory approvals. It will not require approval from Chinese regulators. The deal is expected to be cash positive and will add $4 billion to annual recurring revenue, Cisco executives said on a conference call with analysts.

If the deal is delayed, Cisco will have to pay Splunk a $1.48 billion termination fee.

Tidal Partners, Simpson Thacher & Bartlett and Cravath, Swaine & Moore LLP were advisors to Cisco. Splunk was advised by Catalyst Partners, Morgan Stanley, Skadden, Arps, Slate, and Meijer & Flom LLP.

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