By Milana Vinn, Yuvraj Malik and Aditya Soni
(Reuters) -Cisco Systems on Thursday agreed to buy cybersecurity firm Splunk (NASDAQ:SPLK) for about $28 billion in its biggest-ever deal to strengthen its software business and capitalize on the boom in artificial intelligence.
The deal, which is the biggest technology transaction of the year, will help reduce Cisco (NASDAQ:CSCO)'s reliance on its massive networking equipment business, which has suffered in recent years from supply chain issues and a post-pandemic slowdown in demand.
"The thing that gives you conviction is we are bringing together two companies around security and observability, which are two of the most important areas for our customers and areas where they are unlikely to cut spending in - just because of the criticality of these threats," Cisco CEO Chuck Robbins told Reuters in an interview.
Under Robbins, Cisco has over the years attempted to reduce its traditional reliance on hardware and doubled down on its bets in software and services through deals.
Splunk is known for its strengths in the area of data observability, which helps companies monitor their systems for cybersecurity risks and other threats. The company operates a subscription-based pricing model for customers.
The two companies have held merger talks in the past, but those discussions fell apart, Reuters has previously reported.
Cisco offered $157 in cash for each share of Splunk, representing a 31% premium to the company's last closing price.
Splunk's shares were trading up more than 21% at $145.04, below the offer price of $157, reflecting some uncertainty about regulatory scrutiny. Cisco's shares were down 4%.
San Jose, California-based Cisco already has a data-security partnership with Splunk, whose more than 15,000 customers include many prominent companies such as Coca-Cola (NYSE:KO), Intel (NASDAQ:INTC) and Porsche.
After a surge in revenue growth last year to nearly 40%, Splunk has grappled with an industry-wide slowdown in demand in 2023 wrought by rising interest rates and sticky inflation.
Its acquisition will accelerate revenue growth and gross margin expansion at Cisco in the first fiscal year after the deal's close, according to the companies.
"Cisco bought a good synergistic business at a good price. It's a win for both parties," said Thomas Hayes, chair of hedge fund Great Hill Capital. "This will give Cisco an edge in AI-enabled security moving forward."
While Cisco has pulled off sizable acquisitions in the past, its takeover of Splunk is by far the biggest in its nearly 40-year history. In 2012, Cisco bought TV software company NDS for $5 billion, while in 2017 it bought business software firm AppDynamics Inc for about $3.7 billion.
ANTITRUST SCRUTINY
Some analysts said the overlap in the security business could invite antitrust scrutiny, but Cisco said it was not concerned about the deal facing major regulatory hurdles.
"We don’t have any history of having (antitrust) challenges in the U.S. and the two companies coming together is quite synergistic - in the technology integration there is not a ton of overlap, so there is not a lot of concern about this being some sort of roll up that is going to stop competition," Robbins told Reuters.
The deal, which was unanimously approved by the boards of both Cisco and Splunk, is expected to close by the end of the third quarter of 2024, subject to regulatory approvals. It will not require approval from Chinese regulators. The deal is expected to be cash positive and will add $4 billion in annual recurring revenue, Cisco executives said on a conference call with analysts.
If the deal is shelved, Cisco will have to pay Splunk a termination fee of $1.48 billion.
Tidal Partners, Simpson Thacher & Bartlett, and Cravath, Swaine & Moore LLP were advisers to Cisco. Qatalyst Partners, Morgan Stanley, and Skadden, Arps, Slate, Meagher & Flom LLP advised Splunk.