Once Silicon Valley’s star, Cisco buys Splunk for $38 billion to restore its mojo

SAN FRANCISCO – Cisco Systems’ Mr Chuck Robbins, who has spent years working to restore the networking company to its former glory, is now looking to the US$28 billion (S$38 billion) acquisition of Splunk to help speed up the effort.

Mr Robbins, Cisco’s chief executive since 2015, is betting that Splunk’s data-crunching credentials can help fuel growth and attract new kinds of customers in the artificial intelligence (AI) era.

But the acquisition – Cisco’s biggest ever – is unlikely to revitalise the Silicon Valley stalwart by itself, raising the question whether more deals are on the horizon.

Cisco was once the envy of the tech world. When the Internet was first being built out, the company’s networking switches and routers were a prized commodity.

During the dot.com era, it briefly eclipsed Microsoft as the most valuable company – with a half-trillion-dollar market capitalisation.

Cisco is still the biggest seller of networking gear, but it is become a less exciting business.

The market is characterised by large but often infrequent purchases, and many big buyers of equipment switched to cheaper alternatives.

Under Mr Robbins, Cisco has been trying to pivot to a subscriber and services model that keeps the money flowing.

That is where Splunk comes in.

Its data services have benefitted from the boom in cloud computing and AI and provide the kind of customer relationships Cisco is looking for.

That is why Mr Robbins offered a premium of 31 per cent over Splunk’s share price in cash – a transaction that is equal to about 10 per cent of Cisco’s US$216 billion market value.

Mr Robbins pitched the deal as a chance to strengthen Cisco’s offerings in markets that are growing quickly.

It also will build on initiatives that he has already put in place through smaller deals and internal investments, he said.

Splunk tools allow subscribers to better protect their networks and diagnose where – and how – something has gone wrong.

The computing and networking industry is changing far more quickly now, and Cisco can create value from the massive growth in data, Mr Robbins told analysts on Thursday.

Splunk will also help speed the roll-out of AI products.

In response to new trends in networking, Mr Robbins has opened up Cisco’s gear so that customers can buy just the parts they want – down to individual components.

He has added more software and services, mostly provided via the cloud, mirroring a shift at Microsoft towards long-term relationships.

That is one area where Splunk will help Cisco accelerate its efforts, said chief financial officer Scott Herren.

Splunk will bring in US$4 billion of recurring sales, he said in an interview. That builds on the US$24 billion in recurring revenue that Cisco took in 2022, out of a total of US$57 billion.

While people still think of Cisco as a seller of switches and routers, they should remember the hardware is now sold with software and services, Mr Herren added. That keeps customers in its orbit.

But Cisco may need to make further acquisitions to complete its transition, said Mr Daniel Morgan, a fund manager at Synovus Trust.

A string of earlier purchases did not do much to move the needle, he added. And even Splunk will only accomplish so much.

“Cisco needs to do more of these type of larger deals to boost top-line growth as their core traditional business becomes mature,” Mr Morgan said.

Splunk helps Cisco’s security business, but “the impact is muted” because that unit is still relatively small, he added.

Mr Herren acknowledges Cisco may have to spend money to make money. “That’s one of our top priorities for our capital allocation,” he said.

“And that’s really what was what motivated this.” BLOOMBERG