Cisco, the renowned leader in computer networking equipment, has made a historic move by announcing its largest-ever acquisition. The tech giant is set to acquire the cybersecurity software firm, Splunk, in a cash transaction valued at approximately $28 billion, equivalent to $157 per Splunk share. This significant deal signifies Cisco's commitment to fortifying its cybersecurity capabilities to meet evolving customer demands and to foster growth.
Splunk, a company specializing in cybersecurity and data analysis, has seen its shares surge by 21% following this announcement, while Cisco's shares closed down by 4%. Splunk's technology plays a pivotal role in helping businesses safeguard their data, monitor for potential security breaches, and expedite the resolution of technical issues.
Cisco's CEO, Chuck Robbins, emphasized the pivotal role of artificial intelligence (AI) in enhancing network protection through Splunk's technology. Robbins stated that the combined strengths of Cisco and Splunk will drive the next generation of AI-enabled security and observability, covering everything from threat detection and response to proactive threat prediction and prevention. The ultimate goal is to bolster organizations of all sizes, rendering them more secure and resilient in today's complex threat landscape.
The acquisition is slated to conclude in the third quarter of 2024. Cisco expects it to have a positive impact, with improved gross margins anticipated in the first year and enhanced non-GAAP earnings by the second year.
In terms of scale, this acquisition is a considerable leap for Cisco, representing approximately 13% of the company's market capitalization. Historically, Cisco has been cautious in pursuing blockbuster deals, with its most significant acquisition prior to Splunk being the $6.9 billion purchase of cable set-top box manufacturer Scientific Atlanta in 2006 when Cisco's market capitalization was just over $100 billion.
This bold move reflects Cisco's need to explore new avenues for revenue growth as the public cloud increasingly encroaches on its traditional back-end business. Cybersecurity has become a primary focus area for Cisco. In the fiscal year 2022, Cisco rebranded its core switching and routing business to "Secure, Agile Networks," emphasizing the integration of security into networking infrastructure. The company also established a dedicated reporting unit, "End-to-End Security," focused exclusively on security products. These strategic shifts have borne fruit, with the core business's revenue surging by 22% to $29.1 billion and the security unit seeing a 4% increase in sales to $3.9 billion.
While Cisco's shares have not performed as strongly as the broader tech sector this year, with a 12% increase compared to the Nasdaq's 27% rise, this acquisition underscores the company's determination to remain competitive and innovative in the ever-evolving technology landscape.
Both Chuck Robbins, Cisco's CEO and board chair, and Gary Steele, Splunk's president and CEO, expressed enthusiasm about the merger. Robbins highlighted the synergy between AI and cybersecurity, emphasizing the combined potential to enhance security and observability. On the other hand, Steele eagerly anticipates the next phase of Splunk's growth journey and the value it will bring to shareholders.
Ray Wang, founder and principal analyst at Constellation Research, echoed the sentiment that these companies are well-positioned to complement each other. Wang stressed the natural synergy between threat detection, security, AI, and observability, noting that this union promises better network security and a stronger AI-focused narrative for Cisco, while Splunk gains a key home for its observability platform. This strategic alignment between Cisco's network telemetry and Splunk's observability platform is set to offer customers unparalleled insights into their data, further solidifying the significance of this acquisition.
