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Cisco has agreed to buy U.S. software maker Splunk for $28 billion, its largest acquisition ever, as the U.S. technology group seeks to expand its cybersecurity offerings and seize the rise of artificial intelligence.
The San Jose, Calif.-based company will buy each Splunk share for $157 in cash, a 31% premium to Wednesday’s closing price and create one of the world’s largest software groups.
The deal is the largest technology deal this year in a quiet M&A market as higher interest rates and a tighter antitrust environment drive up the cost of financing deals.
The deal will help Cisco strengthen its software business, which relies heavily on artificial intelligence and provides various cybersecurity services, such as building tools to protect users and digital businesses from data breaches.
Splunk President and CEO Gary Steele will join Cisco’s executive leadership team upon completion of the acquisition, Cisco said in a statement Thursday.
Steele said the deal will accelerate the San Francisco-based company’s mission of “helping organizations around the world become more resilient while delivering immediate and compelling value to our shareholders.”
Founded in 2003, Splunk is used by companies to sift through large amounts of data and uncover security threats that could impact their businesses. The deal is a huge feat for the company, which first went public in 2012 and was valued at nearly $1.6 billion. Its shares soared more than 20% in pre-market trading Thursday after the deal was announced.
Splunk’s annual recurring revenue was $3.9 billion in the quarter ended July 31, up 16% from the same period last year. Revenue for the quarter was $910 million, exceeding analysts’ expectations.
Big U.S. investors have taken aim at Splunk in recent years, betting on the company’s ability to turn things around as it transitions from selling licenses to recurring subscriptions and as demand for its cybersecurity products grows.
Activist investor Starboard disclosed last year that it had taken a 5% stake in Splunk, saying in a presentation at the time that the company had been “plagued by poor execution” but that the valuation could rise if operating results improved.
US private equity group Silver Lake made a $1 billion convertible debt investment in Splunk in June 2021 and received a board seat. Ten months later, another large private equity group, Hellman & Friedman, invested US$1.38 billion to obtain a 7.5% equity investment in the company and a board seat.
Cisco said the merger will be cash flow positive and will increase the company’s gross margin in the first fiscal year after the deal closes. The transaction is expected to close by the end of the third quarter of 2024.
The deal is likely to attract the attention of antitrust regulators in Washington, who have been critical of large deals, especially in the technology industry. Any in-depth scrutiny by competition regulators could slow down the process of completing the deal.