Cisco's Reported Splunk Offer Would Hasten Its Vision

After the markets closed on Friday, The Wall Street Journal reported that narrow-moat Cisco Systems (CSCO)  offered more than $20 billion to acquire narrow-moat Splunk, which would be more than $125 per share based on equity value. The deal would imply a more than 10% premium to Splunk's shares that ended Friday around $115. While the companies are reportedly not in active discussions, we believe this deal is plausible and would be aligned with Cisco's strategy of growing its recurring revenue base through subscription software and services and bolster its growth profile.

We are maintaining our fair value estimates of $54 for Cisco and $175 for Splunk for now. We see Cisco's shares fairly valued and still view Splunk's shares as offering investors some upside. Based on both the strategic fit plus the possibility of Cisco buying an undervalued asset, we would applaud a deal.

We think that Splunk's expertise of streaming data for IT observability and cybersecurity use cases would solidly fill gaps in Cisco's portfolio. The two companies are global strategic partners, and we see their offerings as mostly complementary with limited overlap. Cisco helps organizations create all the connections necessary to transfer data, while Splunk enables entities to glean insights and optimize network and application configurations. Cisco has one of the largest cybersecurity franchises, but its growth has lagged industry leaders and we think adding Splunk's security information streaming and automated response capabilities could kick start growth and bolster its portfolio. We believe the lines between cybersecurity and networking are blurring and that organizations are clamoring for a more unified vision of their security posture across their hybrid cloud networks. In turn, we think long-term leaders in these areas need to be able to ingest data at scale, clean up and uncover insights from the deluge of data, and then automate tasks to remediate issues and enhance performance.