Deepening its bet on security software, Cisco Systems Inc. (CSCO, Financial) announced on Thursday it is acquiring Splunk Inc. (SPLK, Financial) in a deal valued at around $28 billion.
This is the San Jose, California-based software company’s biggest acquisition ever. According to CNBC, its second-largest deal, which was the 2006 purchase of Scientific Atlanta, was valued at $6.9 billion.
According to the terms of the all-cash agreement, Cisco will pay $157 per share for the San Francisco-based cybersecurity company. To fund the acquisition, the company is using a combination of cash and debt.
Pending regulatory approval, the deal is expected to close by the third quarter of 2024, creating one of the world’s largest software companies. There is a caveat, however. If Cisco backs out or the transaction is blocked by regulators, it will pay Splunk a $1.48 billion termination fee. Similarly, should Splunk pull the plug, it will pay a $1 billion breakup fee to Cisco.
Benefits of the acquisition
While the transaction is expected to benefit Cisco’s cash flow and gross margin in the first full year after it closes, and be non-GAAP earnings per share accretive within two years, the combination has much more to offer, especially with the emergence of artificial intelligence technology.
Citing the prevalence of data in today’s hyper-connected world, Cisco said organizations of all kinds will need a more effective way to manage, guard and unlock its true value while remaining digitally resilient.
By teaming up, Cisco and Splunk plan to help their customers do just that.
Despite being the largest provider of computer networking equipment in the world, Cisco has watched its traditional back-end business get overtaken by the cloud. As such, it has found big, new revenue streams through cybersecurity. Its portfolio will be enhanced by the addition of Splunk’s security technology, which helps businesses monitor and analyze their data in order to minimize hacking risks and resolve technical issues quickly.
In a statement, Cisco Chair and CEO Chuck Robbins noted the companies’ combined expertise “will drive the next generation of AI-enabled security and observability.”
“From threat detection and response to threat prediction and prevention, we will help make organizations of all sizes more secure and resilient,” he said.
At the same time, Splunk President and CEO Gay Steele said the union “represents the next phase” of the company’s growth.
“Together, we will form a global security and observability leader that harnesses the power of data and AI to deliver excellent customer outcomes and transform the industry,” he said. “We’re thrilled to join forces with a long-time and trusted partner that shares our passion for innovation and world-class customer experience, and we expect our community of Splunk employees will benefit from even greater opportunities as we bring together two respected and purpose-driven organizations.”
Upon the close of the deal, Steele will join Cisco’s executive leadership team.
Market reaction
Following the announcement, shares of Splunk climbed 21%, while Cisco shares retreated 4%.
Year to date, Cisco’s 11.78% return has trailed the Nasdaq Composite, which has posted a nearly 25% gain. In comparison, Splunk has surpassed the index with a 68.38% return.
Valuation
Despite their market performances so far this year, several metrics indicate value opportunities may be found.
Cisco has a $215.72 billion market cap; its shares were trading around $53.20 on Thursday with a price-earnings ratio of 17.33, a price-book ratio of 4.88 and a price-sales ratio of 3.84.
The GF Value Line suggests the stock is fairly valued currently based on its historical ratios, past financial performance and analysts’ future earnings projections.
At 91 out of 100, the GF Score indicates the company has high outperformance potential. While it received high ratings for profitability, growth, financial strength and momentum, the value rank is more moderate.
Splunk has a $24.26 billion market cap; its shares traded around $144.64 on Thursday with a price-sales ratio of 6.21.
According to the GF Value Line, the stock is modestly undervalued.
The GF Score of 75, however, means the company is likely to have average performance going forward. While it raked in high ratings for value, momentum and growth, the financial strength is more moderate and the profitability rank is low.
Guru interest
As with most mergers and acquisitions, a number of guru investors are poised to benefit from the combination.
Based on data as of the second quarter, 13F filings show 28 gurus were invested in Cisco, while 10 gurus held shares of Splunk. There are also five gurus who have positions in both companies.
With a 0.98% stake, Dodge & Cox is Cisco’s largest guru shareholder. PRIMECAP Management (Trades, Portfolio), the Parnassus Value Equity Fund (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Yacktman Asset Management (Trades, Portfolio), Ray Dalio (Trades, Portfolio)’s Bridgewater Associates and Baillie Gifford (Trades, Portfolio) also have notable positions.
As for Splunk, PRIMECAP has the largest stake with 6.73% of its outstanding shares. Other top guru investors include Jerome Dodson (Trades, Portfolio), Simons’ firm, Joel Greenblatt (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and Jefferies Group (Trades, Portfolio).
In summary
While the deal’s close is still a ways off, investors may want to take advantage of the premium Cisco is paying for Splunk with regard to its current price. However, only time will tell if the combination is a success. If the acquisition fails to go through, they may end up getting burned instead.
