Cisco to buy Splunk: What you need to know about the Cisco-Splunk deal

Key takeaways

• Cisco set to complete its biggest-ever acquisition by buying Splunk
• Deal is worth $157 per share in cash, giving Splunk an equity value of $28 billion
• Acquisition needs approval from Splunk shareholders and regulators, with hopes of closing in the third quarter of 2024
• Wall Street doesn’t expect significant regulatory hurdles
• Cisco hopes Splunk will accelerate its shift into software and cybersecurity while helping grow its position in AI and cloud computing
• Splunk shares have popped on the news, but remain far below the offer price, while Cisco shares have plummeted to multi-week lows in wake of the deal being announced.

Cisco to buy Splunk: What we know

Cisco agreed to buy Splunk in September 2023 for $157 in cash per share, giving Splunk an equity value of $28 billion.

That will be Cisco’s biggest acquisition ever and the price represented a 31% premium to Splunk’s share price before the deal was announced.

Management teams at both companies have agreed on the terms and the deal should close in the third quarter of 2024, assuming Splunk shareholders approve the deal and the pair clear regulatory hurdles.

Why is Cisco buying Splunk?

Ultimately, Cisco believes the addition of Splunk will accelerate its revenue growth and improve its margins, promising the deal will boost cashflow and gross profitability in the first full year of ownership, and contribute to the bottom-line in the second.

Let’s dive into the rationale for the deal…

Cisco is shifting toward software….

Cisco has made a name for itself for providing an array of hardware that is used in networking and data centres, from switches and routers to modules and WiFi hubs. However, the company is in the middle of shifting its attention toward software in search of faster growth, higher margins and a source of recurring income that will give it better visibility and more predictable growth.

… and Splunk provides plenty of it

With that in mind, it is unsurprising that Splunk has been touted as a takeover target for Cisco for some time. Splunk makes software and apps used by over 15,000 businesses to organise and manage data. Mostly, it is used to monitor mission-critical and cybersecurity systems to help detect anomalies and analyse data to protect systems from threats.

Splunk’s products help companies that are using multiple cloud computing platforms stay secure while also helping pool data from different sources together. That is all the more important as businesses start to embrace AI. Cisco is hoping that the addition of Splunk will allow it to offer a market-leading suite of products that will improve security and observability of data for customers. The pair believe that the scale of the combination, creating one of the world’s largest software firms, will help provide a more comprehensive service as companies look to capitalise on AI and put their data to work.

Splunk unveiled new AI-powered offerings earlier this year that is geared toward improving and automating cybersecurity systems. Cisco will now provide the resources needed to maximise its chances of success, including invaluable data that can feed Splunk’s AI tools. Plus, Splunk makes over $3.8 billion in recurring revenue every year, which is exactly what Cisco wants right now.

“Together, we will form a global security and observability leader that harnesses the power of data and AI to deliver excellent customer outcomes and transform the industry,” said Splunk CEO Gary Steele, who will join Cisco’s board and report to Cisco’s boss Chuck Robbins once the deal is completed.

Cisco will accelerate transformation with Splunk

A tie-up between Cisco and Splunk has been on the cards for a while, showing that markets saw sense in the deal before the pair pulled the trigger. Splunk appears to be in all the right pockets of the market – cybersecurity, cloud computing and AI – to make it appear a natural fit for Cisco’s strategy.

Cisco has made a name for itself by making the cables and portals that power datacentres and IT systems, but now it wants to own and power the data and information that runs through them – and it believes Splunk can help it get there quicker.

Will Cisco and Splunk face regulatory hurdles?

Wall Street is currently confident that the proposal to combine Cisco and Splunk won’t face too much regulatory scrutiny, mostly because there is little overlap between each one’s software businesses.

Brokers have flagged that the issue, if any, that could cause regulators concern is the overlap between Splunk’s observability software and Cisco’s AppDynamics platform, although this is thought to be a minor problem in the grand scheme of things.

Will we see more consolidation in cybersecurity?

The Cisco-Splunk deal is one of the biggest in the cybersecurity space despite a flurry of multi-billion dollar deals in recent years, with several big players having bought their way into the space. For example, back in 2022, we saw Microsoft buy a company that detects cyber threats named Miburo while Alphabet closed its acquisition of cybersecurity firm Mandiant.

This shows there major tech companies have an appetite for smaller players that have carved-out a position in the market and the Cisco-Splunk deal could signal there is more to come, especially as demand for cybersecurity continues to rise.

What does this mean for Cisco stock?

Markets did not embrace the news when it was announced, with Cisco shares slumping almost 4% on the day. The stock has underperformed the market this year and the stock trades at a discount to its rivals, suggesting there may be a lack of confidence in the company and its prospects.

A large part of Cisco’s success over its existence has come down to its growth through acquisitions but it has found it more difficult to find success over the past decade and the size of the Splunk deal could represent a new level of complexity.

The size of the premium may also weigh on the mind of investors given Cisco has overpaid in the past. Notably, reports suggested Cisco floated a $20 billion price tag for Splunk last year before being rebuffed. Splunk already trades at a premium to its rivals, at over 34x forward earnings, and that only gets higher at Cisco’s offer price.

Turning to the chart, we can see the announcement caused a sharp drop lower, causing a gap to form. The stock is now trading at its lowest level in over five weeks. The stock appears to have found some support at around $53.30 but we have seen it slip below here today. We could see Cisco shares sink to as low as $52.30, marking the April-peak and ceiling that held throughout June and most of July, before finding some much-needed support. Notably, the 100-day moving average, currently at $52, is also aligning with this level. The RSI is firmly in bearish territory but yet to test oversold territory.

On the upside, the immediate job is to reclaim the 50-day moving average, currently at $54.50 and aligned the gap higher we saw in August, before looking to close the more recent gap at $55.50. Only then does the 20-month of $57.80 set at the start of September come back into play.

What does this mean for Splunk stock?

The Splunk share price will now be highly influenced by the progress made in the acquisition. Most importantly, $157 will now remain the upper limit unless the deal is amended and Cisco agrees to pay more. Nobody will want to buy Splunk for over $157 in the knowledge that is what they will receive when the deal closes in 2024.

The Splunk share price may also act as a barometer for confidence in the deal. The closer it trades to that that $157 price tag, the more bullish markets are that the deal will be completed. Assuming everything runs smoothly, Splunk shares should gradually move closer to the price tag as we get closer to completion, with each milestone helping raise hope it will go through.

On the other hand, markets may signal doubt that the deal will be done if the share price trades significantly below here. Splunk shares popped on news of the deal, but only managed to hit $145. It is early days and there are regulatory hurdles to clear, so there is still an element of risk in play. Plus, some investors may see better opportunities elsewhere considering their returns would be limited over the next year.

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