Cisco's Surprise $28 Billion Splunk Acquisition Raises Questions on Wall Street
In a move that caught many on Wall Street off guard, networking giant Cisco Systems (CSCO) has announced its intention to acquire cybersecurity firm Splunk (SPLK) for a hefty $28 billion. While some investors see this as a strategic manoeuvre to bolster annual recurring revenue and enhance Cisco's financial outlook, the collective sentiment among financial analysts appears lukewarm.
Needham analyst Alex Henderson, who maintains a 'hold' rating on Cisco, expressed reservations about the deal's potential to address Cisco's underlying issues. Henderson pointed to Cisco's less-than-stellar track record in realizing synergies from previous acquisitions. He observed that Cisco's Security business still lags behind in adopting cloud-native or micro-services-based solutions, making it vulnerable in a rapidly evolving cybersecurity landscape. Moreover, Henderson anticipates a slowdown in Splunk's growth over the coming years.
Henderson commented, "We see the deal as a merger of two legacy players in a category where new competition is emerging from strong platform Security names such as CrowdStrike's LogScale and Palo Alto, which are directly targeting the legacy security information and event management market."
On a more optimistic note, Jefferies analyst George Notter acknowledged the deal's focus on data extraction and analysis, which aligns with Splunk's core strengths. However, Notter also emphasized the need for seamless integration, an area where Cisco has had mixed success historically. The timeline for combining Cisco's Extended Detection & Response platform and VAS Secure Insight tools with Splunk's Security Information & Event Management tools remains uncertain.
Notter raised concerns about the geographical distribution of the two companies' customer bases. While Cisco boasts a vast network of over 80,000 channel partners worldwide, Splunk derives a significant portion of its revenue domestically. Notter characterized Splunk's sales channel strategy as "immature."
"Nonetheless," Notter opined, "the strategic nature of the deal, the ability to accelerate Cisco’s growth rate, and the ability to further the transition to recurring revenue models make this deal worthwhile, in our view." Notter maintains a 'buy' rating on Cisco shares with a price target of $59.50.
KeyBanc Capital Markets analyst Thomas Blakey, who has a 'sector-weight' rating on Cisco, took a more positive stance. He viewed the transaction as a boon for Cisco, leveraging the company's current position and expanding its solution offerings in security, AI, and observability. Blakey highlighted the potential for both companies to provide added value across the IT stack to new and existing customers.
While Blakey acknowledged the execution risk due to the deal's size and competitive markets where Cisco and Splunk intersect, as well as integration challenges, he emphasized the "long-term merits" of the deal. He believes that the synergies will primarily focus on revenue growth rather than cost-cutting.
In a financial landscape where the technology and cybersecurity sectors are rapidly evolving, Cisco's bold move to acquire Splunk is undeniably intriguing. As Wall Street grapples with the implications, investors will closely monitor the execution of this high-stakes merger and its impact on the future of both companies.