Cisco In a groundbreaking move, Cisco Systems (CSCO.O) recently announced a staggering $28 billion deal to acquire Splunk (SPLK.O), a cybersecurity and data analytics firm. This deal has sent ripples across the tech industry, leaving experts and analysts speculating about its potential impact. In this article, we’ll delve into the details of this acquisition and explore why it could be a catalyst for other technology giants to embark on similar buying sprees in the software industry.
The Splunk-Cisco Merger
Splunk was in the midst of a significant business model shift from licensing its software to a subscription-based revenue model when it made headlines by agreeing to be acquired by Cisco. This acquisition ranks as the third-largest in the history of software acquisitions, underscoring its significance.
Cisco’s CEO, Chuck Robbins, emphasized that the allure of this deal lies in the $4 billion in annual recurring revenue that Splunk’s subscription-based model would bring. This shift towards subscription revenue has caught the attention of tech conglomerates looking to diversify their portfolios.
Cisco Potential Acquisition Targets
As Splunk paves the way for software companies focusing on subscription revenue, other players in the field are also attracting interest from tech giants. Companies like Elastic NV (3E1.F), Datadog (DDOG.O), Crowdstrike Holdings (CRWD.O), and Dynatrace (DT.N) are now potential acquisition targets. Tech behemoths such as Microsoft (MSFT.O), Adobe (ADBE.O), and Oracle (ORCL.N) find themselves grappling with corporate customers’ cost-cutting measures, making acquisitions of subscription-focused software vendors a logical next step.
The Silence of the Giants
While this acquisition has raised eyebrows, Microsoft, Adobe, and Oracle have remained tight-lipped about their intentions. The silence from these tech giants has only added to the intrigue surrounding potential future deals.
Cisco Boosting Tech M&A
The tech industry has witnessed a notable decline in merger and acquisition (M&A) activity in 2023, with a staggering 61% drop in the first eight months of the year, as reported by LSEG data. However, the acquisition of Splunk by Cisco has rekindled hope among dealmakers. David Chen, co-head of global technology investment banking at Morgan Stanley (MS.N), predicts a resurgence in tech M&A. He attributes this optimism to a rally in the Nasdaq 100 index and the fading fear of an impending economic recession.
Cisco The Role of Interest Rates
A significant factor influencing the resurgence of tech M&A is the Federal Reserve’s decision to halt interest rate hikes. This move has provided acquirers with greater certainty about their funding costs, making large-scale acquisitions more feasible.
Signs of Things to Come
Even before Cisco’s monumental deal, there were subtle indications that tech giants were eyeing software firm acquisitions, albeit on a smaller scale. IBM (IBM.N), for instance, announced its intention to acquire the technology spend-management platform Apptio for $4.6 billion in June.
Cisco Attractive Valuations
Splunk’s journey to acquisition was partly shaped by its stock performance. Despite a 39% increase in its share price in 2023, the stock was still down 44% from its October 2020 peak, driven by the pandemic-induced surge in IT spending. Many of Splunk’s peers had experienced similar stock trajectories.
Software stocks, in general, currently trade at historically low valuations, making them appealing targets for acquisition. The average software stock is valued at just 5.8 times projected 12-month revenue, a 28% discount compared to its eight-year historical average, excluding the temporary COVID-19-induced valuation boost.
Cisco’s Calculated Move
Cisco’s acquisition of Splunk has been scrutinized by industry analysts who have deemed the purchase price reasonable. BTIG analysts noted that a typical security company with 20% growth typically trades at about 7 times sales, aligning with the price Cisco is paying.
Private Software Companies in the Mix
The wave of software M&A may not limited to publicly traded companies. Private software firms that raised capital at high valuations during the 2021 fundraising cycle may also inclined to seek acquisition rather than face the challenge of securing new investments at lower valuations.
Conclusion
Cisco’s $28 billion acquisition of Splunk has ushered in a new era of possibilities in the tech industry. As software companies increasingly shift towards subscription-based revenue models, it’s only a matter of time before more tech giants follow in Cisco’s footsteps. The combination of attractive valuations, favorable economic conditions, and a growing appetite for transformational transactions is setting the stage for a resurgence in tech M&A.
FAQs
1. Why did Cisco acquire Splunk?
Cisco acquired Splunk to capitalize on Splunk’s subscription-based revenue model, which projected to bring in $4 billion in annual recurring revenue.
2. Which other tech giants are likely to make similar acquisitions in the software industry?
Microsoft, Adobe, and Oracle are potential acquirers of software vendors with subscription-focused revenue models.
3. What factors are driving the resurgence of tech M&A?
A rally in the Nasdaq 100 index, the Federal Reserve’s decision to halt interest rate hikes, and improving economic conditions are fueling optimism for tech M&A.
4. Are private software companies also expected to participate in the wave of M&A?
Yes, some private software companies may prefer acquisition over raising funds at lower valuations.
5. How do software stock valuations compare to historical averages?
Software stocks currently trade at a discount compared to their historical averages, making them attractive acquisition targets.