Business

Cisco's Splunk Acquisition: A Precursor to a Tech M&A Boom?

Dan Nicholson

The tech Mergers and Acquisitions (M&A) scene recently witnessed a colossal deal with Cisco's staggering $28 billion buyout of Splunk, an AI-driven cybersecurity company. The acquisition signals a potential resurgence in tech acquisitions, following a period of apparent calm in the sector.

Breaking the Silence in Tech M&A

Over the past year, tech M&A activities have noticeably slowed. However, Cisco's decision to make its largest acquisition ever by investing a hefty sum for Splunk points to the increasing importance of cybersecurity and AI in the tech world. The magnitude of this deal further reaffirms the sentiment that companies are once again showing interest in mergers and acquisitions.

Jefferies analyst Brent Thill noted a renewed optimism that more M&A activities might ensue in the tech space, particularly because the Federal Reserve has paused its rate hikes. This pause provides a clearer funding picture for those who were previously hesitant due to economic uncertainties.

A Look at the Numbers

M&A data for 2023 doesn't look optimistic at first glance. Global M&A activity has plunged by 38% in the first half of 2023 when compared to the same period in 2022, as reported by Refinitiv. However, there's a silver lining for software companies. The software sector has shown impressive resilience in public markets throughout 2023, hinting at a possible revival of M&A as rate hikes stabilize and companies seek external growth.

Thill has also noted the encouraging performance of software stocks, which have surpassed the S&P 500 by an impressive 13%. This growth is attributed to a milder than anticipated macroeconomic impact, burgeoning AI developments, favorable valuations, and capital shifting back to tech from other industries.

August reports from Yahoo Finance highlighted the immense potential of the cybersecurity and AI sectors for tech deals. The Splunk acquisition by Cisco neatly aligns with these insights, hinting at further growth potential in both areas.

Tempering Expectations

While the Splunk acquisition is monumental, it may not necessarily herald a series of similarly sized deals. Due to the constraints of high interest rates and the complexities of finalizing vast deals, future transactions may more likely range in the millions to low billions. Regulatory challenges also loom, making mega-deals tricky. Deutsche Bank analyst Brad Zelnick has expressed concerns about the current regulatory environment potentially affecting deal timelines, even if Cisco's acquisition of Splunk doesn't face many product overlap issues.

A Subscription-Driven Future

A pivotal driver behind Cisco's acquisition of Splunk is the predictable subscription revenue stream. Splunk's shift from a licensing model to subscription-based revenue was a strong selling point. This model is an indicator of the direction in which the industry is moving, emphasizing stable subscription revenues.

Companies like Elastic NV, Datadog, Crowdstrike Holdings, and Dynatrace now find themselves in the crosshairs of tech giants such as Microsoft, Adobe, and Oracle. These conglomerates, dealing with budget-conscious corporate customers, are on the lookout for predictable revenue streams like those offered by software vendors with a subscription model.

A Resurging M&A Landscape

While M&A activity in the technology sector had declined by 61% year-to-date in the first eight months of 2023, the current climate suggests a shift. Tech giants, previously overshadowed by private equity firms in M&A, seem poised to make more assertive moves.

Software companies' stock performances, coupled with historically low valuations, make them prime targets for acquisitions. The valuation of Splunk by Cisco at seven times its projected 12-month revenue seems reasonable to many analysts, providing a benchmark for future deals.

In conclusion, while there are challenges ahead, many industry experts are optimistic about the tech M&A landscape. As the dust settles on Cisco's mega-deal, the tech industry will keenly watch for the ripples it might create in the M&A space.

Sources:

Yahoo Finance

Reuters

Dan Nicholson is the author of “Rigging the Game: How to Achieve Financial Certainty, Navigate Risk and Make Money on Your Own Terms,” deemed a best-seller by USA Today and The Wall Street Journal. In addition to founding the award-winning accounting and financial consulting firm Nth Degree CPAs, Dan has created and run multiple small businesses, including Certainty U and the Certified Certainty Advisor program.

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