Cisco has acquired Splunk Inc. for $28 billions, in a deal that marks the biggest acquisition in the tech giant’s history. The transaction is a proof of the company’s commitment to leading the AI and cybersecurity revolution, as it is not just a merger of two companies, but a strategic alignment that paves the way for a revolution of the network infrastructure and security landscape. With this in-depth analysis, we delve into the implications of this deal and how it sets the stage for future growth in an increasingly connected and data-driven world
Industry Overview
In recent years, the advancements in the tech industry have been enormous, with a particular note on artificial intelligence that has been the investment object of several companies with Microsoft and chipmaker Nvidia being on the front foot of the AI revolution so far. However, there is a prerequisite for some of these groundbreaking developments, and that is the ability to transmit huge amounts of data in real time. Today, networks are an essential part of business, education, government, and home communications and here is where network infrastructure comes into play. IT networking refers to the construction, design, and use of network equipment to give the possibility to several computing devices to exchange data with one another and the market refers to both networking hardware and software, but also services and security.
Revenue in the networking infrastructure, despite some recent fluctuations, is expected to keep yielding positive growth rates in the following years, with the market size of enterprise network infrastructure especially set to increase by nearly 20% by 2027.
A pivotal part of IT networking is the protection of it through network security infrastructure, a process that consists in the installation of security measures to prevent the access, modification, and theft of resources and data. One of the worldwide leaders in networking for the Internet is Cisco Systems. Cisco hardware, software, and service offerings are used to create the Internet solutions that make networks possible, giving individuals, companies, and countries easy access to information anywhere, at any time.
With all type of businesses, corporate entities, organizations, and even governments shifting to computerized systems to streamline daily operations, ensuring cybersecurity has become a paramount objective to protect systems, networks, and programs from digital attacks. The global cyber security market size is projected to grow from $172.32 billion in 2023 to $424.97 billion in 2030, at a CAGR of 13.8% during the forecast 2023-2030. In particular, North America accounted for a market value of USD 67.77 billion in 2022.
The key cyber security players are now implanting core technologies such as machine learning, the Internet of Things, Big Data and a relevant trend in the industry is the increased adoption of cloud computing that is currently driving the industry growth. Players in the market include once again Cisco, together with IBM Corporations and others.
Cisco, with the particular aim of building out its cyber security offering and seize on the rise of AI, has agreed its biggest acquisition ever with a $28bn deal to buy US software maker Splunk. The deal will enable Cisco to provide a variety of cyber security services, such as building tools to protect users and digital businesses from data breaches, while bolstering its software business that heavily relies on AI.
Indeed, the adoption and impact of AI are outpacing that of any technology introduction we have ever seen and an effective use of the right data at massive scale is critical to enable the meaningful benefits of AI. To truly reap these benefits, as we have said, organizations need the infrastructure to power it, the data to develop it, a security platform to protect it, and an observability platform to monitor and manage it in real time. After the acquisition, Cisco will be able to do all four together, creating a “unique set of solutions for networking, security, and operations executives in the market.”
About Cisco
Cisco Systems, is an American conglomerate which operates all over the world, spanning from the Amercias, to the EMEA and APAC regions. The San Jose-headquartered company is divided in four main product categories, namely Networking, Security, Collaboration and Observability.
The Networking segment encompasses its core technologies such as switching, routing, optics solutions and compute products. It is the backbone of Cisco’s offering, as it supports the fundamental operations of internet and intranet infrastructures for businesses of all sizes. The Security part comprises cloud and application security, network security and device security services widely adopted all over the world. Furthermore, its Collaboration product category refers to meeting and collaboration devices and platform as a service (CPaaS) offerings with the Observability branch that consists of its full stack observability offerings.
In general, Cisco’s business model is mainly structured around the development, manufacturing and selling of networking hardware, software and telecommunication equipment. Specifically, the Internet of Things (IoT) offering, which include network connectivity devices and management software that enable customers to connect and automate industrial equipment, represents a growing area in which Cisco is betting on. The Company lately has focused heavily also on a wide range of services, including technical support services and advanced services for network management, optimization and transformation. Moreover, in the last years there has been a shift in Cisco’s business model, mainly due to the selling of devices and services through subscription models, in order to obtain more predictable revenue streams and deepen costumer engagement thanks to ongoing software updates and service enhancements.
More specifically, Cisco’s revenue model is built on both direct, handled by the company’s sales staff, and indirect sales channels through a vast network of channel partners. Cisco’s costumers range from large corporations and service providers, small and medium-sized businesses and the public sector. By looking at the division of revenues across business segments, it is notable the increasing importance of the secure and agile networks services, symbolizing Cisco’s strong bet on the production of secure networks, as safety online is becoming more and more important in the tech industry. Going more in depth with numbers, revenues in FY23 were close to 57bn USD, with more than 50% coming from the security networks branch. In FY21, this business segment did not even represent the 1% of Cisco’s total revenues. Cisco’s has been able throughout the years to increase its revenues and always keep constant the gross margin, the operating margin and the net margin, respectively close to 63%, 27% and 22%.
Source: Cisco annual report
With respect to costs, Cisco heavily depends on technological innovation, so Research and Development Costs (R&Ds) represent a substantial part of the company’s total expenses. On the other hand, D&A do not constitute a real threat to Cisco’s profitability, as they are very small compared to revenues, mainly thanks to the focus on hardware and software services. In addition, Cisco’s strong financial performance has always been backed by robust operating cash flows which historically helped to support strategic investments and to boost shareholders return through dividends and share repurchases. The amount of dividends paid has been stable over time, with a smaller decrease in the payout ratio, while not decreasing the amount of dividend per shares, mainly thanks to the higher net income obtained year after year.
Source: Cisco annual report
About Splunk
Splunk, Inc. is a software company engaged in the development and marketing of cloud services and licensed software solutions. It specializes in the analysis of big data generated by machines in order to provide solutions that are pivotal in operational intelligence, security information and event management.
The core offering from Splunk is the so-called “Splunk Entreprise”, which collects and analyzes a high volume of machine-generated data. It allows users to monitor data by giving operational insights into their IT, security and business operations. “Splunk Cloud”, on the other hand, provides the same service as the previous but is delivered as a hosted, cloud-based service. Furthermore, “Splunk Observability Suite”,includes tools for infrastructure and application performance monitoring, real-time log management and incidence response. Very important is the role of “Splunk Security Operations Suite”, which helps organizations detect, respond to and mitigate cyber threats in real time. Finally, “Splunk for Industrial IoT” focuses on monitoring and diagnosing operational issues in industrial settings.
Splunk’s revenue model is primarily subscription-based, which is very aligned to the broader industry trend towards SaaS (Software as a Service) offerings. Furthermore, the company generates revenue from licensing its software for on-premises deployments. Customers are to be found globally, and spam from large enterprises to small and mid-sized firms, with a small percentage of revenues coming from the public sector. In the last FY, Splunk’s revenues touched 4bn USD. The company is able to keep a good gross margin of nearly 80%, but its performance becomes worse when operating costs kick in, as EBITDA margin has just turned positive in the last FY, close to 7%. Prior to last year, the company has always been characterized by negative EBIT and negative net cash flow. The reassuring data is given by the fact that the overall negative change in cash has been due to investing cash flow, mainly because of large capital expenditures to obtain a higher costumer reach.
Source: Splunk annual report
To conclude, Cisco is a very solid company, which benefits from good operating margin and strong cash flows generation. Furthermore, it is the industry leader all over the world and it is very active in finding new market segments that can boost profitability and returns for shareholders. On the other hand, Splunk is a relatively new company, as it was created in 2003. Nonetheless, it has grown more and more in the last years, and even if its financial performance is not exceptional right now, its competitive advantage vis a vis its competitors and the growing market in which it operates make it a good bet for the future, especially thanks to Cisco’s know-how and experience in the sector.
Deal Structure and Rationales
Cisco’s acquisition of Splunk was all-cash, with Cisco paying $157 per share, resulting in a $28 billion deal. The deal is expected to be cash-flow positive, with expectations of Cisco’s non-GAAP gross margin and EPS to increase in fiscal year 2025 and 2026 respectively. Additionally, it is expected to accelerate Cisco's revenue growth and non-GAAP gross margin expansion. The deal successfully went through on March 18th, 2024, after being announced just 6 months prior, on September 21st, 2023.
Cisco's networking abilities, where the company already makes up the majority 41% of infrastructure, combined with Splunk’s capabilities in data analysis and digital resilience will undoubtedly offer an improved customer experience while reducing costs and engineering economic growth.
By leveraging Splunk’s current prowess in this field, Cisco will be able to offer its clients of all different sizes a high-functioning security and a high-functioning observability solution that prevents and responds to cyber threats while granting a smooth digital experience across a multi-cloud hybrid environment. Cisco itself will also be able to take advantage of Splunk’s existing security expertise, resulting in an optimized networking solution, that is intelligent, secure, and resilient. This enhanced and fortified networking portfolio, combined with the fact that both Cisco and Splunk are two frontrunners in AI, will allow customers to safely and effortlessly utilize AI’s capacities throughout their corporations.
The reformed and improved solutions offered by Cisco post-acquisition will result in a consolidation of various products, overall reducing costs for the firm, while delivering more efficient results. Future product releases are also in the works, such as the integration of Cisco’s Talos threat intelligence into Splunk and the integration of Splunk’s market-leading SIEM and SOAR platform into Cisco, greatly improving threat detection and enhancing the companies’ security strategies by creating unique methods to detect and respond to potential threats. These innovative products could lead to new highly profitable revenue streams for Cisco, resulting in further growth of the company.
Valuation
Cisco’s acquisition of Splunk was an all-cash deal worth $28bn, paying Splunk’s investors $157 per share. When the deal was announced in September, that represented a 31% premium to Splunk’s previous closing price. Cisco reported that the transaction is expected to be cash flow positive. The two companies have very different Debt/Equity and Profit Margin ratios, namely 0.25 (Cisco) vs 4.20 (Splunk) and 22.13% vs 6.26%. However, Splunk’s ROE is 35.61%, higher than Cisco’s (30%), making the company attractive for investors.
At the moment of transaction, Splunk’s most important multiples were: EV/Sales of 6.57x, EV/EBITDA of 60.04x, P/E of 104.60x. Its two main competitors are Datadog and Dynatrace. DDOG has EV/Sales of 17.96x, EV/EBITDA of 278.25x, P/E of 857.79x, showing higher ratios than SPLK, especially considering the Price to Earnings one, due to its well-established position in the log-management market. On the other hand, DT has EV/Sales of 9.23x, EV/EBITDA of 72.63x, P/E of 68.79x, showing similar ratios with Splunk, except for a lower P/E ratio, mainly due to its lower Market Cap.
Deal Structure and Rationales
Cisco’s acquisition of Splunk was all-cash, with Cisco paying $157 per share, resulting in a $28 billion deal. The deal is expected to be cash-flow positive, with expectations of Cisco’s non-GAAP gross margin and EPS to increase in fiscal year 2025 and 2026 respectively. Additionally, it is expected to accelerate Cisco's revenue growth and non-GAAP gross margin expansion. The deal successfully went through on March 18th, 2024, after being announced just 6 months prior, on September 21st, 2023.
Cisco's networking abilities, where the company already makes up the majority 41% of infrastructure, combined with Splunk’s capabilities in data analysis and digital resilience will undoubtedly offer an improved customer experience while reducing costs and engineering economic growth.
By leveraging Splunk’s current prowess in this field, Cisco will be able to offer its clients of all different sizes a high-functioning security and a high-functioning observability solution that prevents and responds to cyber threats while granting a smooth digital experience across a multi-cloud hybrid environment. Cisco itself will also be able to take advantage of Splunk’s existing security expertise, resulting in an optimized networking solution, that is intelligent, secure, and resilient. This enhanced and fortified networking portfolio, combined with the fact that both Cisco and Splunk are two frontrunners in AI, will allow customers to safely and effortlessly utilize AI’s capacities throughout their corporations.
The reformed and improved solutions offered by Cisco post-acquisition will result in a consolidation of various products, overall reducing costs for the firm, while delivering more efficient results. Future product releases are also in the works, such as the integration of Cisco’s Talos threat intelligence into Splunk and the integration of Splunk’s market-leading SIEM and SOAR platform into Cisco, greatly improving threat detection and enhancing the companies’ security strategies by creating unique methods to detect and respond to potential threats. These innovative products could lead to new highly profitable revenue streams for Cisco, resulting in further growth of the company.
Valuation
Cisco’s acquisition of Splunk was an all-cash deal worth $28bn, paying Splunk’s investors $157 per share. When the deal was announced in September, that represented a 31% premium to Splunk’s previous closing price. Cisco reported that the transaction is expected to be cash flow positive. The two companies have very different Debt/Equity and Profit Margin ratios, namely 0.25 (Cisco) vs 4.20 (Splunk) and 22.13% vs 6.26%. However, Splunk’s ROE is 35.61%, higher than Cisco’s (30%), making the company attractive for investors.
At the moment of transaction, Splunk’s most important multiples were: EV/Sales of 6.57x, EV/EBITDA of 60.04x, P/E of 104.60x. Its two main competitors are Datadog and Dynatrace. DDOG has EV/Sales of 17.96x, EV/EBITDA of 278.25x, P/E of 857.79x, showing higher ratios than SPLK, especially considering the Price to Earnings one, due to its well-established position in the log-management market. On the other hand, DT has EV/Sales of 9.23x, EV/EBITDA of 72.63x, P/E of 68.79x, showing similar ratios with Splunk, except for a lower P/E ratio, mainly due to its lower Market Cap.
Source: internal elaboration
In conclusion, Cisco's strategic acquisition of Splunk underlines a new era for network infrastructure and cybersecurity. The unification of Cisco's robust networking capabilities with Splunk's advanced data analytics fortifies the tech landscape, promising enhanced security solutions for an increasingly digital world. The deal is a signal that investments related to AI and cloud computing is not the only driver for innovation, but also the secure use and intelligent application of it represent key pillars for improvement. Both companies involved in the transaction track records of driving growth and their future looks promising thanks to the synergistic potential post-acquisition. To conclude, the expansion of Cisco’s capabilities and Splunk’s reach underlines the importance of strategic collaborations in fostering resilient, adaptive, and forward-looking digital ecosystems
By Giacomo Gulmini, Ginevra Ferraioli, Francesco Bianchi and Sal Vassallo
Sources:
- Bloomberg
- Investopedia
- Market research report
- Statista
- FT
- Cisco
- Splunk
- FactSet
- Orbis
- Yahoo! Finance