Cisco acquires cybersecurity firm Splunk for a record $28 billion in cash.

Cisco has announced its largest-ever acquisition, revealing plans to purchase cybersecurity software company Splunk at a price of $157 per share in an all-cash transaction valued at approximately $28 billion. This significant move saw Splunk shares surge by 21%, while Cisco’s stock closed down 4%.

Splunk specializes in data monitoring and analysis, assisting businesses in minimizing hacking risks and swiftly resolving technical issues. Cisco, a prominent maker of computer networking equipment, has been expanding its cybersecurity division to meet customer demands and stimulate growth.

Cisco’s CEO, Chuck Robbins, stressed the importance of leveraging artificial intelligence, especially the AI capabilities inherent in Splunk’s technology, to fortify network security. He stated, “Our combined capabilities will drive the next generation of AI-enabled security and observability, from threat detection and response to threat prediction and prevention, making organizations of all sizes more secure and resilient.”

The acquisition is anticipated to conclude in the third quarter of 2024, with Cisco expecting improvements in gross margins in the first year and non-GAAP earnings in the second year.

This purchase price represents approximately 13% of Cisco’s market capitalization, a significant sum for a company that has typically shied away from blockbuster deals. Prior to Splunk, Cisco’s largest acquisition was the $6.9 billion purchase of cable set-top box manufacturer Scientific Atlanta in 2006, when Cisco’s market cap was just over $100 billion.

As the public cloud has increasingly encroached on Cisco’s traditional backend business, the company has sought new and substantial revenue streams, with cybersecurity emerging as its primary focus.

In fiscal year 2022, Cisco rebranded its core switching and routing business as “Secure, Agile Networks,” emphasizing the integration of security into networking equipment. The core business reported a 22% revenue increase, reaching $29.1 billion, while the security unit recorded a 4% sales rise, amounting to $3.9 billion.

However, Cisco’s stock performance has lagged behind the Nasdaq, with a 12% increase this year compared to the Nasdaq’s 27% surge. Over the past five years, Cisco has also underperformed the broader sector, with only a 10% gain compared to the Nasdaq’s 66% growth.

Cisco’s CEO, Robbins, expects to see organizational synergies between Cisco and Splunk manifest within 12 to 18 months. The acquisition will be financed through a combination of cash and debt.

Nevertheless, some analysts have raised concerns about potential product overlap, regulatory scrutiny, and the price Cisco paid for Splunk. Splunk’s shift towards a cloud-oriented offering from its previous on-premises approach has been described as “underwhelming.”

Gary Steele, Splunk’s CEO, who will join Cisco’s executive team following the completion of the deal, highlighted that many large customers still rely on their customer-managed environment.

In the event that Cisco backs out of the deal or it encounters regulatory obstacles, Cisco would be required to pay Splunk a termination fee of $1.48 billion, as stated in a regulatory filing. Conversely, if Splunk decides not to proceed, it would pay a $1 billion breakup fee to Cisco.

In 2023, Cisco has already acquired four security-focused companies: Armorblox (a threat detection platform), Oort (identity management), Valtix, and Lightspin (both in cloud security).

Tidal Partners, Simpson Thacher, and Cravath, Swaine & Moore served as advisors to Cisco, while Qatalyst Partners, Morgan Stanley, and Skadden, Arps, Slate, Meagher & Flom advised Splunk.