Splunk Stock Investors Should Be Wary of Cisco’s Offer

After trading hours on Friday, The Wall Street Journal reported that narrow-moat Cisco Systems (CSCO) had put in a bid to acquire narrow-moat Splunk (SPLK) for more than $20 billion. While the companies are not in active discussions yet, we urge Splunk shareholders to remain cautious of Splunk’s valuation baked into Cisco’s bid. While the precise amount was not disclosed in the news report, we suspect that Cisco’s offer of “more than $20 billion” would not compensate Splunk shareholders adequately.

We ran through a few scenarios with different bid prices. Based on our calculations, we’d caution Splunk shareholders against agreeing to a deal below roughly $28 billion. Overall, we think Splunk has a robust business poised for strong growth due to the firm’s dominance in the enterprise full-stack monitoring market and secular tailwinds behind the firm’s back. As a result, we think Splunk’s shareholders should hold out for a better offer from either Cisco or some other interested party.

At the same time, it is worth noting that Splunk’s shares are down almost 34% from their November high. Such a downturn may have investors worried about holding Splunk shares. However, we’ve maintained our position that the market’s selling activity vis a vis Splunk’s shares has been overly punitive. We suspect that Cisco has seen the same opportunity that we’ve identified and has chosen to capitalize on it by offering to buy Splunk at a discount.