Sept 21 (Portal) – Cisco Systems (CSCO.O) agreed on Thursday to buy cybersecurity company Splunk (SPLK.O) for about $28 billion. This is its biggest deal yet to bolster its software business and capitalize on the artificial intelligence boom.
The deal, which marks the biggest technology transaction of the year, will help reduce Cisco’s reliance on its huge network equipment business, which has suffered in recent years from supply chain problems and a drop in demand following the pandemic.
“What wins you over is that we’re bringing two companies together around security and observability, two of the most important areas for our customers and areas where they’re unlikely to cut spending – just because of the urgency of these threats.” “Chuck Robbins, Cisco’s CEO told Portal in an interview.
Under Robbins, Cisco has sought to reduce its traditional reliance on hardware over the years and doubled its investments in 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.
The two companies have held merger talks in the past, but these fell through, Portal previously reported.
Cisco offered $157 in cash for each Splunk share, a 31% premium to the company’s most recent closing price.
Splunk shares traded up more than 21% at $145.04, below the $157 offering price, reflecting some uncertainty over regulatory scrutiny. Shares of Cisco fell 4%.
Cisco, based in San Jose, California, already has a data security partnership with Splunk, whose more than 15,000 customers include many well-known companies such as Coca-Cola (KO.N), Intel (INTC.O) and Porsche.
After a jump in revenue growth to nearly 40% last year, Splunk is grappling with an industry-wide decline in demand in 2023 caused by rising interest rates and persistent inflation.
According to the companies, the acquisition will accelerate Cisco’s revenue growth and gross margin expansion in the first fiscal year after the transaction closes.
“Cisco bought a good, synergistic company at a good price. “It’s a win-win,” said Thomas Hayes, chairman of hedge fund Great Hill Capital. “This will give Cisco a lead in AI-powered security going forward.”
While Cisco has made large acquisitions in the past, its acquisition of Splunk is by far the largest in the company’s nearly 40-year history. In 2012, Cisco bought TV software company NDS for $5 billion, while in 2017 it bought enterprise software company AppDynamics Inc. for about $3.7 billion.
Some analysts said the security business overlap could lead to antitrust scrutiny, but Cisco said it wasn’t concerned that the deal faces major regulatory hurdles.
“There haven’t been any (antitrust) challenges in the US in the past, and the combination of the two companies is pretty synergistic – there’s not a lot of overlap in terms of technology integration, so there’s not a lot of concern about that.” “A kind of roll-up, that will stop competition,” Robbins told Portal.
The deal, which was unanimously approved by the boards of Cisco and Splunk, is expected to close by the end of the third quarter of 2024, subject to regulatory approvals. Approval from Chinese regulatory authorities is not required. The deal is expected to be cash accretive and result in annual recurring revenue of $4 billion, Cisco executives said in a conference call with analysts.
If the deal is put on hold, Cisco will have to pay Splunk a termination fee of $1.48 billion.
Tidal Partners, Simpson Thacher & Bartlett and Cravath, Swaine & Moore LLP served as advisors to Cisco. Qatalyst Partners, Morgan Stanley and Skadden, Arps, Slate, Meagher & Flom LLP advised Splunk.
Reporting by Milana Vinn in New York and Yuvraj Malik in Bengaluru; Writing by Anirban Sen; Editing by Anil D’Silva and Lisa Shumaker
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