Cisco Acquired Splunk for USD 28 B to Boost its AI and Cybersecurity Goals

Highlights:

• Cisco, based in San Jose, will pay USD 157 per share for Splunk, a 31% premium to the company’s closing price on Wednesday. The transaction is likely to be completed in the third quarter of next year.
• Investors aren’t overjoyed with the acquisition, as Cisco’s stock dropped four percent in early trading, while Splunk’s price rose by more than 21%.

Cisco Systems Inc. announced the USD 28 billion acquisition of cybersecurity and data observation and analysis business Splunk Inc., its largest accretion in nearly 39 years.

The acquisition propels Cisco, best renowned for its networking and data center technology, even higher in the ranks of prominent cybersecurity firms. In recent years, the well-known acquirer has purchased several market enterprises.

Cisco is up against a slew of cybersecurity competitors, including Palo Alto Networks Inc., CrowdStrike Holdings Inc., Check Point Software Technologies Ltd., Fortinet Inc., and Zscaler Inc., as well as some of the largest software and cloud computing firms, including Microsoft Corp., Amazon Web Services Inc., and Google LLC.

Cisco, based in San Jose, will pay USD 157 per share for Splunk, a 31% premium to the company’s closing price on Wednesday. The transaction is likely to be completed in the third quarter of next year.

Investors aren’t overjoyed with the acquisition, as Cisco’s stock dropped four percent in early trading, while Splunk’s price rose by more than 21%.

For years, the cybersecurity business has witnessed a lot of startup activity, as well as a lot of mergers and acquisitions, as cyberattacks have risen in number and size, and consumers have sought to better their defenses with streamlined cybersecurity products. Palo Alto Networks was also reported to be in talks to buy Talon Cyber Security for USD 400 million. CrowdStrike acquired Bionic.ai earlier this week.

Chuck Robbins, Cisco’s Chief Executive, stressed in a blog and over conference call the worth of collaboration of Splunk’s and Cisco’s data, specifically in assisting businesses “move from threat detection and response to threat prediction and prevention, making organizations of all sizes more secure and resilient.”

More specifically, Robbins believes there is a good connection between Cisco’s extended detection and response (XDR) product, which became broadly available on August 1, and Splunk’s security information and event management (SIEM) offering to assist customers foresee and prevent threats before they occur. He also sees a connection between Splunk’s data and platform and Cisco’s purchased AppDynamics and ThousandEyes capabilities.

Allie Mellen, Forrester Principal Analyst, stated the acquisition has been a “massive win for Cisco’s security business” but mentioned that the victory relies on how Cisco handles it. “Cisco has long been a case study for acquisitions that don’t live up to their initial promise and suffer from underinvestment and a lack of focus,” she added, and noted that Cisco has maintained the acquisition of Duo Security Inc. since 2018.

The uncertainty this deal poses to Cisco and Splunk customers could work in the favor of competitors for a short period. “This is a boon for Microsoft’s SIEM business with Sentinel,” Mellen mentioned. “Users will flock to or expand their Sentinel deployments as they hedge their bets between where Cisco takes Splunk and where Microsoft takes Sentinel. Other smaller players will emerge to feed off this uncertainty for security teams.”

Robbins stressed how the agreement may assist increase the use of generative artificial intelligence, a subject that has exploded with the introduction of extremely proficient chatbots like OpenAI LP’s ChatGPT, in cybersecurity and observability. “On top of the data and security challenges, Generative AI is rapidly transforming industries and creating new opportunities. Together, Cisco and Splunk see a broad range of data across applications, security, and the network. With the scale we bring and a deep foundation of trust, we believe we’re very well-positioned to provide customers visibility to their data and enable them to take advantage of the many opportunities with AI,” added Robbins.

Although Cisco intended to position the acquisition as a move toward greater participation in generative artificial intelligence, neither company is considered a leader in the field, and it is unclear how the combination will precisely achieve those objectives.

Having said that, generative AI is viewed as a powerful new tool for cyberattackers and, eventually, a powerful instrument for defenders. The more data that is available, the more powerful generative AI large language models can be.

Furthermore, every firm today recognizes the importance of incorporating generative and other AI technologies into their products, and they are eager for more data to feed AI models to improve their performance. Splunk, the industry leader in observability, the process of evaluating the state of computer systems using data such as logs, would generate vast amounts of fresh data.

Zeus Kerravala, Principal Analyst at ZK Research, said, “The last year has seen AI explode and Cisco wants to be one of the premier AI companies. To do this, it needs data. It has lots of network data but very little ‘up the stack.’ Splunk gives them a massive amount of data to use to improve its full-stack observability story but also security, which is the biggest needle-moving opportunity for Cisco.”

Last quarter, Robbins indicated that Cisco had received a half-billion-dollar order for networking infrastructure for AI from hyperscaler organizations.

According to Robbins, corporate security operations centers continue to rely extensively on Splunk products and have stated that they want Splunk to maintain a major on-premises capability.

Cisco anticipates the acquisition to be “cash flow positive and gross margin accretive” in the first fiscal year following its completion, and accretive in adjusted earnings per share in the second year, as well as accelerate revenue growth and gross margin expansion. Cisco also stated that the transaction will bring nearly USD four billion in annually recurring revenue, bolstering its attempts to increase subscription revenue.