Cisco: We Maintain Our $56 Fair Value Estimate, as the Acquisition of Splunk Is a Solid Move

We maintain our $56 fair value estimate for wide-moat Cisco Systems CSCO, as the company announced an all-cash deal to acquire Splunk SPLK for $157 per share, or $28 billion in equity value. Cisco’s shares fell about 4% on the news, but we still view the firm as fairly valued.

Overall, this combination is not particularly surprising, as Cisco was rumored to have made a $20 billion bid for Splunk in early 2022. Even at $28 billion, we think Cisco is paying a fair price, as the 31% premium is on par with many technology deals, and we anticipate that revenue synergies from the faster-growing Splunk may offset this premium paid over time. The price is equivalent to 7 times Splunk’s annual recurring revenue of $4 billion, which we again view as reasonable.

Splunk’s Security Business a Crown Jewel

Strategically, we like that the deal expands Cisco’s presence in software and security—Splunk’s security business appears to be the crown jewel for the firm. Both Cisco and Splunk have observability businesses that suggest product redundancies, but management believes the two products are complementary.

Looking at the market reaction, we suspect Cisco investors may have hoped for the acquisition of a firm with a stronger cloud presence. Splunk is transitioning to the cloud but still has a hefty on-premises business. Nonetheless, owning Splunk should make Cisco even stronger in on-premises infrastructure, which we don’t think will evaporate any time soon. Management anticipates strong revenue synergies from the combination, and we believe the deal was done with growth in mind, rather than operational efficiencies.

Cisco anticipates the deal closing in the third calendar quarter of 2024, near the start of the company’s fiscal 2025. The firm does not believe it needs approval from the Chinese government to close the deal, and we think there’s a high likelihood of it going through. We don’t foresee a bidding war driving up the acquisition price, either.