Why Did Cisco Buy Splunk?

Shares of Splunk (NASDAQ:SPLK) soared by 21.14% following an announcement that it would be acquired by Cisco (NASDAQ:CSCO). Unsurprisingly, Cisco share price fell on the news, down 3.94% on the day.

The deal will be worth an estimated $28 billion and consummated at a price of $157 per share, but is it a good one?

Is Cisco’s Acquisition of Splunk a Good Deal?

In a giant deal like this, Cisco’s largest ever, the key metric to assess is whether the deal is acretive, meaning does it lead to incremental growth.

Cisco management has reported that it expects the deal to be acretive to gross margins and, critically, cash flows in the first year and to earnings by year two.

The danger of these gargantuan deals is that research shows they are often a leading indicator of poor share price performance for the acquiring company.

That same research surmises that CEOs often make a big acquisitive splash to demonstrate to their Board of Directors that they can make bold moves to grow a firm’s top and bottom lines, but the challenges of integration are frequently underestimated.

Not only does that acquiring company need to integrate systems and processes, but critically it must impose its own cultural norms on the acquired firm, which frequently leads to pushback from new employees. Whether that will happen in this case remains to be seen.

Certainly, Cisco has a presence in data analytics but its solutions are nowhere near as comprehensive as Splunk’s. Indeed Splunk has broad capability in log and event management, as well as security information. So is this why the two companies joined forces, to provide customers with an integrated end-to-end solution?

Why Did Cisco Buy Splunk?

Cisco Systems (NASDAQ:CSCO) is a networking giant while Splunk (NASDAQ:SPLK) is a data analytics powerhouse, so why would this merger make sense?

When Cisco first got started, it was exclusively focused on hardware sales but, over time, it has evolved into a software and cloud-based solutions provider too, and that’s where Splunk fits in as a software specialist with expertise in searching, monitoring, and analyzing machine-generated big data.

By bringing the two companies together under one umbrella, management can create a one-stop shop for network and data solutions because Cisco’s cloud portfolio benefits from Splunk’s data analytics expertise. For example, Cisco’s cloud infrastructure could automatically detect anomalies and route traffic using real-time data analytics from Splunk

Cisco already enjoys significant market share in the security solutions sector thanks to products like Cisco Umbrella and Duo Security but Splunk’s advanced analytics tools could make these services even more robust.

The idea of combining Splunk with Cisco is ultimately to enable faster threat detection and automated responses that could save businesses from the enormous costs of data breaches.

Expanding Customer Value

Both companies target similar sectors, such as healthcare, finance and Information technology, so the overlap allows Cisco to cross-sell its services and vice versa, Splunk could sell its solutions to Cisco’s existing clientele.

By integrating Splunk’s offering to create an all-in-one solution, Cisco has the potential to boost its existing average revenue per user.

It also expands the moat Cisco already enjoys by making it more challenging for competitors to challenge it (because they won’t have a one-stop solution), and for customers to switch because rivals won’t have all the bells and whistles to serve them.

As such, the stick rate for customers should increase, which in turn should boost customer lifetime value. 

Competitive Landscape

Another motivation for Cisco’s acquisition of Splunk is to strengthen its own position in the competitive landscape.

Cisco must stave off competition from the likes of Microsoft and Amazon, both of whom increasingly offer integrated solutions that combine networking (as Cisco provides), data storage, analytics and security (which Splunk offers).

By joining forces, Cisco and Splunk pose a serious threat to those technology giants in the full-stack service space.

Conclusion

The reasons for Cisco to acquire Splunk are compelling, including accelerating Cisco’s cloud offerings and fortifying its security solutions, in addition to expanding its customer base and their lifetime value.

It also helps to strengthen Cisco’s position in the competitive landscape against encroaching threats from Alphabet and Microsoft. 

Above all, the opportunity to provide customers with a one-stop shop, integrated technology solution helps Cisco to approach customers with a more compelling value proposition, which should increase their stick-rate, and boost their customer lifetime value. That, in turn, should lead to higher revenues, margins, and profitability over the long-term.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.