In a major shift in its strategic direction, Cisco Systems Inc. is set to acquire big-data firm Splunk in a whopping $28 billion cash deal, amounting to $157 per share. This acquisition is a significant step in Cisco’s business transformation towards a more recurring-revenue model, with the addition of Splunk’s tools expected to bolster Cisco’s software offerings, particularly in the security space where the company is already a dominant player.

Splunk’s shares soared by 21% in Thursday afternoon trading following the announcement, indicating a positive market response to the deal. The acquisition aligns well with Cisco’s strategic focus on observability and security, and the integration of Splunk’s security-information and event-management offering will enable the company to shift from threat detection and response to threat prediction and prevention, a move that could redefine the security landscape.

Cisco Systems to Acquire Splunk in a $28 Billion Deal

Cisco Systems Inc. is set to acquire big-data tools provider Splunk in a deal worth $28 billion, or $157 per share in cash. The acquisition will strengthen Cisco’s software offerings and enhance its threat prediction capabilities in the security space, a domain where Cisco is a leading player by revenue.

A Strategic Move

Shares of Splunk escalated by 21% in Thursday afternoon trading to $144.98, from a closing price of $119.59 on Wednesday. Daniel Newman, principal analyst at Futurum Research, believes this acquisition aligns well with Cisco’s strategic focus on observability and security growth. Observability is the tech buzzword for the ability to deduce crucial insights from massive data sets through various technologies to identify a problem.

Scott Herren, Cisco’s Chief Financial Officer, views this as a significant stride in their business transformation towards a more recurring-revenue model. Splunk’s addition is expected to contribute an additional $4 billion in annual recurring revenue. He also emphasized the strategic fit of the deal, citing minimal product overlap, good cultural fit, and robust financial returns from Splunk.

Enhancing Security and Observability

Cisco’s integration with Splunk will enhance its extended detection and response platform, combining vast security insights from both entities to move from threat detection and response to threat prediction and prevention, according to Chuck Robbins, Cisco’s Chief Executive. The merger will also enhance observability across the full IT stack from application to network in hybrid and multi-cloud environments.

Speculations about this merger have been ongoing for years as Cisco shifts towards generating more revenue from software sales. Piper Sandler analyst James Fish highlighted the operational synergy of this combination, accelerating Cisco’s recurring software transition and providing a growth driver to address normalization headwinds.

International Market Opportunities and Challenges

Kirk Materne from Evercore ISI sees potential for Splunk to leverage Cisco’s global distribution platform and partner channel, particularly in international markets, which currently account for only a third of Splunk’s revenue. However, this deal also comes with challenges. As pointed out by Mizuho’s Gregg Moskowitz, Splunk has faced issues in recent years, including customer postponement of cloud migrations due to the economic climate and criticism of Splunk’s pricing.

The Road Ahead

The merger is viewed as an opportunity to make greater investments in new solutions, accelerate innovation, and increase global scale to cater to customers of all sizes. This acquisition is among several others made by Cisco this year, including cloud-security companies Valtix and Lightspin, threat-detection platform Armorblox, and identity-management company Oort.

Cisco anticipates the deal to be cash-flow positive and accretive to gross margins in the first fiscal year after closure. It also expects accretion to Cisco’s adjusted earnings per share in the second year. Although there are concerns about potential product overlap and regulatory scrutiny, Herren expects the deal to close in nine to 12 months without any hurdles.

Takeaways

This acquisition is another step in Cisco’s strategic shift towards software and services, potentially setting a new trend in the tech sector. The deal could also influence the pricing strategy and customer migration to the cloud for Splunk. However, the successful integration of both entities and navigating through the challenges will determine the long-term benefits of this merger.