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Cisco has agreed its biggest acquisition ever with a $28bn deal to buy US software maker Splunk as the US tech group seeks to build out its cyber security offering and seize on the rise of artificial intelligence.
The San Jose, California-based company will pay $157 in cash for each Splunk share, representing a premium of 31 per cent to its closing share price on Wednesday and creating one of the world’s largest software groups.
The transaction is the biggest tech deal of the year in an otherwise quiet mergers and acquisitions market, as the cost of financing deals has risen due to higher interest rates and a more restrictive antitrust environment.
The deal will help Cisco bolster its software business, which relies heavily on AI and provides a variety of cyber security services, such as building tools to protect users and digital businesses from data breaches.
Splunk’s president and chief executive Gary Steele will join Cisco’s executive leadership team after the acquisition has been completed, a Cisco statement said on Thursday.
Steele said the deal would accelerate the San Francisco-based company’s “mission to help organisations worldwide become more resilient, while delivering immediate and compelling value to our shareholders”.
Founded in 2003, Splunk is used by companies to sift through large troves of data and find security threats that could affect their businesses. The deal is a huge feat for the company, which made its public markets debut in 2012 at an almost $1.6bn valuation. Its stock price shot up more than 20 per cent in pre-market trading on Thursday after the deal was announced.
In the quarter ended July 31, Splunk’s annual recurring revenue was $3.9bn, up 16 per cent on the same period last year. Its revenue for the quarter was $910mn, beating analysts’ expectations.
Large US investors have in recent years targeted Splunk, betting on a turnaround of the company amid its transition from selling licences to recurring subscriptions, and rising demand for its cyber security products.
Activist investor Starboard disclosed last year that it had taken a 5 per cent stake in Splunk, stating in a presentation at the time that the company had been “plagued by mis-execution” but could see an uplift in valuation if operational performance improved.
US private equity group Silver Lake made a $1bn convertible debt investment in Splunk in June 2021 and took a board seat. Ten months later, Hellman & Friedman, another large private equity group, invested $1.38bn to build a 7.5 per cent equity investment in the company and also gained a board seat.
Cisco said the combination would be cash flow positive and would boost the company’s gross margin in the first fiscal year after the deal is closed. It expects to finalise the deal by the end of the third quarter of 2024.
The transaction is likely to capture the attention of antitrust regulators in Washington who have been critical of large deals, particularly in the tech sector. Any in-depth scrutiny by competition watchdogs could slow down the process of completing the transaction.