On Thursday, Cisco Systems agreed to buy cybersecurity firm Splunk for about $28 billion, the network equipment giant’s biggest-ever deal to strengthen its software business and capitalize on the boom in artificial intelligence. The acquisition will help reduce Cisco’s reliance on its massive networking equipment business, which has struggled recently as customers have moved away from buying hardware and preferring subscription-based services offered by Amazon.com Inc’s AWS unit and other cloud computing companies.
The deal represents Cisco’s latest effort to boost revenue from its software and cloud business, where it has been making inroads into a market long dominated by smaller rivals like Google, Microsoft, and Amazon. The San Francisco-based company, expected to be cash-flow positive in the first year after the deal closes, also said it will add $4 billion yearly in recurring revenue from the purchase.
For Cisco, the deal is a bet that information technology departments will increasingly spend on services to manage the vast amount of data generated by the Internet and their operations. Splunk sells products that let businesses see what is happening in their networks, diagnose whether something is wrong, and determine how to fix it. It is a big part of security operations centers, the heartbeat for experts trying to detect and stop cyber attacks.
If regulators approve, the deal will create one of the largest software companies in the world. The company’s shares, up 5% at midday, have lagged the Nasdaq this year, rising just 12%, while the tech-heavy index has jumped 27%.
Chief executive Chuck Robbins told analysts the acquisition was a response to an industry changing faster than ever, driven by hyper-connectivity, AI, and increasing cybersecurity threats. It also fits with a strategy of opening up Cisco’s gear so that customers can buy only the parts they need rather than paying for full boxes that may be unused.
The purchase, which will be financed with a mix of cash and debt, was endorsed by the board of directors of both companies. It is expected to close by the third quarter of 2024. The company expects non-GAAP earnings per share accretive in the first year following closing and to grow free cash flow by more than $4 billion in 2024. In a filing with regulators, Cisco plans to provide more details about the deal. Splunk shareholders are expected to receive $157 a share, or a 31% premium to Wednesday’s closing price. The deal is backed by a committee of independent directors at each company. The transaction is also expected to be tax-deductible. Splunk stockholders are not expected to vote on the deal. If the transaction is not approved, Cisco will pay a termination fee of $1.48 billion to Splunk and a breakup fee of $1 billion to Cisco. Splunk has a large employee base in the United States and elsewhere.