AI cybersecurity race is on: Cisco to acquire Splunk for US$28bn

The deal would turn Cisco and Splunk into one of the world's largest software companies.
25 September 2023

The combination of Cisco and Splunk makes them well-positioned to lead in cybersecurity and observability in the age of AI. Source: Shutterstock

  • The combination of Cisco and Splunk makes them well-positioned to lead in cybersecurity and observability in the age of AI.
  • Cisco expects the deal to accelerate both revenue growth and gross margin expansion.
  • Analysts view the acquisition as a “shot across the bow” of other cybersecurity firms, which will now have more significant competition. 

Over the past ten months, significant advancements stemming from large language models have sped up the rivalry between hackers and enterprises. On a positive note, as generative AI threats are coming to light, cybersecurity companies are pushing ahead and enhancing their protective measures. A notable instance is the recent deal between Cisco and Splunk, a move aimed at strengthening the former’s software division with advanced AI-driven security technology.

The deal sees Cisco, the world’s largest maker of computer networking equipment, acquiring Splunk, the cybersecurity and observability leader, for US$157 per share in cash, representing approximately US$28 billion in equity value. In short, to deepen the company’s bet on security software, Cisco has made its largest-ever deal yet.

The announcement came on top of the slew of recent acquisitions that the company has made in the AI and software security space since the start of the year. Cisco is basically betting that Splunk’s data-crunching credentials can help fuel growth and attract new customers in the AI era.

 “We’re excited to bring Cisco and Splunk together. Our combined capabilities will drive the next generation of AI-enabled security and observability,” Chuck Robbins, chair and CEO of Cisco, said in a statement announcing the deal. “From threat detection and response to threat prediction and prevention, we will help make organizations of all sizes more secure and resilient,” he added.

Combined, Cisco and Splunk will become one of the world's largest software companies and will accelerate Cisco's business transformation to more recurring revenue. Source: Cisco's

Combined, Cisco and Splunk will become one of the world’s largest software companies and will accelerate Cisco’s business transformation towards generating more recurring revenue. Source: Cisco’s

Frankly, Splunk’s data services have benefited from the boom in cloud computing and AI, and it provides the kind of customer relationships Cisco is looking for. That is why Robbins pitched the deal as a chance to quickly strengthen Cisco’s offerings in growing markets. As stated by Bloomberg, Robbins offered a premium of 31% over Splunk’s share price in cash — a transaction equal to about 10% of Cisco’s US$216 billion market value.

The price jarred investors and, according to Wedbush Securities analyst Dan Ives, the deal values Splunk at roughly six times its fiscal 2025 revenues. However, since Cisco is focused on the next generation of AI-enabled security and observability, Ives said Splunk’s well-regarded, unique platform makes this the right move at the right time. “We view this as a fair multiple for this strategic asset,” he wrote in a note last week.

For context, founded in 2003, Splunk is a cybersecurity company that offers software to help businesses manage, monitor, and analyze machine-generated data to prevent hacks and fix technical issues. On the other hand, Cisco, founded in 1984, is a tech conglomerate focused on selling telecommunications, networking equipment, and related software.

How will the deal beef up the AI cybersecurity offerings by Cisco?

For starters, the acquisition builds on Splunk’s history of assisting organizations enhance their digital resilience and will help accelerate Cisco’s strategy “to connect everything to make anything possible securely,” the statement reads. “The combination of these two established leaders in AI, security, and observability will help make organizations more secure and resilient,” Cisco said.

The networking giant reckons that the acceleration and adoption of generative AI, expanding threat surfaces, and multiple cloud environments create complexity unlike anything organizations have faced. “Together, we will form a global security and observability leader that harnesses the power of data and AI to deliver excellent customer outcomes and transform the industry,” Gary Steele, president and CEO of Splunk, said.

Steele also believes that uniting with Cisco represents the next phase of Splunk’s growth journey, accelerating the company’s mission to help organizations worldwide become more resilient while delivering immediate and compelling value to shareholders. 

“Factoring in the acceleration and adoption of generative AI, expanding threat surfaces, and multiple cloud environments, it creates a level of complexity unlike anything organizations have faced. Cisco and Splunk will address these challenges head-on,” he added.

Specifically, Splunk’s security capabilities complement Cisco’s existing portfolio. “Cisco and Splunk’s complementary capabilities will provide observability across hybrid and multi-cloud environments, enabling the company’s customers to deliver smooth application experiences that power their digital businesses,” Cisco’s statement reads.

Impact on growth

Cisco stated that the transaction is expected to be cash flow positive and gross margin accretive in the first fiscal year post-close. Additionally, it is expected to accelerate Cisco’s revenue growth and gross margin expansion. In an interview, Cisco’s Chief Financial Officer Scott Herren told Bloomberg that Splunk will bring in US$4 billion of recurring sales.

“That builds on the US$24 billion in recurring revenue that Cisco took last year, out of US$57 billion. That’s the benefit of having made this transformation. “It gives us much more predictability and visibility into our results. And so it’s lower risk,” he said. While it isn’t clear whether this deal will have regulatory implications, Cisco hopes to complete it by the third quarter of next year. 

Wedbush’s Ives sees the acquisition as a “shot across the bow” of other cybersecurity firms, including Zscaler, Palo Alto Networks, and Crowdstrike, which will now have more significant competition. He argued it might spark a “massive wave” of mergers and acquisitions over the next six to nine months in the broader tech space as larger firms compete in the AI and cyber security arms races.