Cisco Makes Huge Investment in Splunk with $28 Billion Acquisition

In a significant move towards software and artificial intelligence-powered data analysis, Cisco Systems Inc. has announced its acquisition of Splunk Inc. for approximately $28 billion. This deal marks Cisco’s largest acquisition to date.

The networking giant will pay $157 per share in cash, the companies said in a statement Thursday, representing a 31% premium to Splunk’s closing price on Wednesday. The purchase corresponds to approximately 10% of Cisco’s market value.

Under CEO Chuck Robbins, Cisco has tried to reduce its dependence on one-time sales of expensive equipment and move to software and services. Splunk is its most expensive push into this space, helping Cisco reach a wider customer base that can leverage the new services to gain insight into their networking and computing operations.

The deal should be cash-flow positive in the first year after closing and add $4 billion in annual recurring revenue, Cisco Chief Financial Officer Scott Herren said on a conference call with analysts on Thursday. The companies expect the acquisition to be completed by the end of the third quarter of next year.

San Francisco-based Splunk is known for its data discovery services that help companies monitor internal systems for network health, cybersecurity risks and other insights. It competes with companies like Datadog Inc. and Dynatrace Inc. The agreement is a bet for information technology departments to increase their investments in information management services, which is partly due to the enthusiasm of the entire national economy for artificial intelligence.

“The IT world is changing faster than we’ve ever seen – with hyper-connectivity, artificial intelligence and increasing cyber threats, the value of data is only going to increase, which is why this deal makes sense,” Robbins said on a conference call. “Together we will take on these challenges and help our customers become more sustainable and safer.”

The cybersecurity industry is adapting to the new era of cloud services and artificial intelligence, which together increase the speed and scope of threats. While Cisco already has ways for customers to see what’s happening on their networks,

Splunk takes these products even further, company executives said. Users will be alerted to unusual activity on their systems, with much more information and the ability to react immediately.

However, Cisco investors did not warmly welcome the deal, as shares fell 3.9% by 11:26 p.m. In New York. Some thought the acquisition too expensive. “It’s a good move from a strategic point of view, but the move doesn’t have enough value to overcome the exorbitant price,” said David Trainer, director of market research firm New Constructs.

William Blair analyst Jonathan Ho estimates that acquisition prices for Splunk are significantly higher than the average software peer based on 2024 revenue estimates.

The valuation reflects a recent push for a tighter ship. Splunk has focused on improving profitability under the leadership of CEO Gary Steele, who joined the company last year. “We’ve seen Splunk go from a growth company at all costs to one that has cleaned up costs and improved margins under new management,” said Bernstein analyst Mark Moerdler.

The companies had held talks before, but the talks broke off last year, Bloomberg reported. Woo Jin Ho, an analyst at Bloomberg Intelligence, described the acquisition as the “Moby Dick” of deals that have been talked about for some time. That could help Cisco find the recurring subscription-based software revenue it has been looking for, Ho added.

The Splunk acquisition is much larger than Cisco’s roughly $7 billion takeover of Scientific Atlanta in 2006. “We haven’t made a big deal because we never had the conviction of a big deal,” Robbins said. “And I can tell you that the work that Gary has done at Splunk over the last 18 months is extraordinary.”

Although regulators have been more eager to challenge large mergers, Robbins said he believes the deal will close within nine to 12 months. Herren added that the deal does not require regulatory approval in China — a stumbling block for Intel Corp.’s recent bid for Tower Semiconductor Ltd.

“There’s no overlap in our portfolio, so we don’t combine industries,” Robbins said. “We’ve had a lot of advice looking into it.”