days after Cisco announced the acquisition of Splunk by 28 billion dollarsthere are several technology conglomerates that would be considering the option of reaching a similar agreement with other software providers with predictable subscription revenue.
Splunk’s sale to Cisco becomes the third largest software of all time, and even more so if you take into account that the software provider was in the process of transforming its business model. Instead of licensing its software, it was going to charge for subscriptions.
A step forward for Cisco
We are facing the largest technological transaction so far in 2023. For Cisco it means reduce its huge dependence on the network equipment business, with major problems in the supply chain and slowed demand in recent times. And it is that the 4 billion dollarscoming from annual recurring revenue from Splunk subscriptions, will be essential to that resurgence.
For CISCO this agreement means capitalize on the rise of AIinvest more funds in essential areas such as security and observability and transmit a defense of its most important areas as a way to combat threats. For Chuck RobbinsCEO of Cisco, a key goal was to reduce the company’s traditional dependence on hardware.
It must be taken into account that Splunk is a benchmark in the area of data observability, helping other companies monitor their systems for cybersecurity risks.
The economic impact of the operation
Cisco offered $157 per share in cash to Splunk (a 31% premium to the company’s last closing price). This led to Splunk shares rose more than 21% to $145.04, below the offer price of $157. For its part, Cisco shares fell 4%.
The acquisition will result in revenue growth and gross margin expansion for Cisco during the first fiscal year after the deal closes. Very positive results are expected if we take into account that the alliance between both companies is already has more than 15,000 clients in data security matters. With this, Splunk experienced a growth in its income during 2022 of 40%.
Splunk Stock Up 39% in 2023, although below its maximum harvested in October 2020 of 44%. The deal between Cisco and Splunk valued the latter at 7 times projected 12-month revenue.
Previously, in 2012, Cisco bought NDS for $5 billion and in 2017 AppDynamics for about $3.7 billionso its commitment to software is not trivial.
An inevitable domino effect
Other companies focused on subscription revenue such as Elastic N.V., Datadog, Crowdstrike Holdings and Dynatrace are now the potential target for technology conglomerates of the likes of Microsoft, Adobe and Oraclewho are urgently seeking to cut expenses.
The agreements would not take long to arrive if one takes into account that during the first months of 2023, activity in the technology sector has fallen by 61%, that is, up to $231.5 billion. Likewise, deals in the software sector have been dominated by private equity firms over the last year such as Francisco Partners and TPGwhich were made with New Relic for 6.5 billion dollars.
If the predictions of the rebound in the Nasdaq 100 index for this year are fulfilled, and given the current economic recession, There will be many companies that will follow in Cisco’s footsteps. That said, software stocks are cheap and attractive, as trading at 5.8 times projected 12-month earnings28% below its eight-year historical average.
Before the deal between Cisco and Splunk, there were signs that showed the importance of buying software companies, since IBM agreed in June to purchase Apptio for 4.6 billion dollars.
The context is ideal, since many private software companies are more receptive to being sold than to being forced to raise money from their investors at a lower valuation price.
All this could avoid a antitrust scrutinyalthough it will be key to see what happens until the closing of the operation between Cisco and Splunk scheduled for the end of the third quarter of 2024. If the agreement was archived, Cisco would be forced to pay Splunk a cancellation fee of $1.48 billion.