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Cisco Systems Inc. finally followed through on a long-rumored target Thursday when it announced it will acquire cybersecurity company Splunk Inc. for $28 billion in cash, but it may want to close the deal soon.
The companies announced plans for Cisco to acquire Splunk for $157 a share, sending Splunk shares
SPLK,
soaring Thursday, while shares of Cisco
CSCO,
fell as executives assured investors the acquisition would be cash-flow positive and increase gross margins in the first fiscal year after its close.
The deal is expected to close in the third quarter of calendar-year 2024; Cisco’s fiscal year ends in July. Cisco also assured investors the deal would not affect its existing buyback program or dividend.
Guggenheim analyst John DiFucci, who has a neutral rating on Splunk, said it would be best to get the deal closed as early as possible in 2024 because of accounting standards regarding subscription revenue.
Since accounting standard ASC 606 requires upfront revenue recognition of many subscription-contract renewals, “this results in a boost in revenue in years that are heavy in renewals, like 2024 is, according to our model,” DiFucci said. “So Cisco may want to try to close the deal earlier than the [third quarter of calendar 2024] if it can.”
Cisco reported $57 billion in sales in fiscal 2023, and forecast $57 billion to $58.2 billion for fiscal 2024. Splunk, with a fiscal year that ends in January, last reported annual revenue of $3.65 billion, and forecast fiscal 2024 revenue of $3.93 billion to $3.95 billion.
Citi Research analyst Atif Malik, who covers Cisco, said his neutral rating and $55 price target are unchanged as he waits for the deal to close.
“We view the deal favorably, as it improves Cisco’s software mix and exposure to the large and growing security and observability markets,” Malik said in a Thursday note. “Importantly, we note the larger size of the acquisition is more likely to accelerate Cisco’s shift away from legacy hardware and services.”
Wedbush analyst Daniel Ives, who has a neutral rating on Splunk, said the “monster deal” indicated a “tidal wave of software M&A on the horizon.”
“We view this as a fair multiple for this strategic asset, with now investors laser-focused on who is next,” Ives said. “We do not see any other bidders or regulatory issues blocking this deal.”
Ives said the deal is “a shot across the bow” for others in cybersecurity, such as Palo Alto Networks Inc.
PANW,
Check Point Software Technologies Ltd.
CHKP,
CrowdStrike Holdings Inc.
CRWD,
Microsoft Corp.
MSFT,
and Zscaler Inc.
ZS,
It’s not exactly Cisco’s first shot, however. Back in 2018, Cisco scooped up authentication company Duo for $2.35 billion.
This year alone, Cisco has acquired, or has offered to acquire, 10 other companies: cloud network-security company Valtix, end-to-end cloud security company Lightspin, event-based analytics company Smartlook, generative and predictive AI company Armorblox, network performance-monitoring company Accedian, broadband network-monitoring company SamKnows Ltd., identity threat-detection company Oort Inc., Greece-based Code BGP, cloud-service platform Working Group Two and firewall policy management company Pinacle.
The ETFMG Prime Cyber Security ETF
HACK
closed down 1.1% on Thursday, while Cisco shares fell 3.9% to close at $53.34, leading the Dow Jones Industrial Average
DJIA
to a decline of 1.1% on the day. Splunk shares surged 20.8% to close at $144.43.
Shares of two other big names in cybersecurity had a worse day than Cisco: Palantir Technologies Inc.
PLTR,
closed down 5% while Cloudflare Inc.
NET,
fell 5.7%.
Other cybersecurity stocks that lost 3% or more Thursday included Zscaler and Palo Alto Networks.
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