Cisco has been expanding from its hardware roots over the past few years, and this all-cash $28 billion acquisition will push it even further on its journey to building its business around recurring revenue.
Cisco Chief Executive Chuck Robbins said this morning that the deal will add about $4 billion in annualized recurring revenue to the company’s books, putting the company’s ARR in the neighborhood of $30 billion. Cisco also said Splunk will be accretive to the company’s adjusted earning per share by year two. Cisco has methodically transformed its business into recurring revenue, and Splunk is an accelerant.
Cisco’s ambition: securely connecting everything
In a blog post, Robbins wrote that the combination of Cisco and Splunk “will accelerate Cisco’s strategy to securely connect everything to make anything possible.” This is an ambitious statement, but Cisco has used statements like this to create a lighthouse for the company to row to.
Voice will be free; video is the new voice; and building the human network are historical examples. One of its challenges with its “if it’s connected, it’s protected” statement is that its security portfolio is still transitioning from product to platform. The addition of Splunk provides more security-centric data and can fast-track the transition of the security business.
In a separate statement, Robbins added, “We’re excited to bring Cisco and Splunk together. Our combined capabilities will drive the next generation of AI-enabled security and observability. From threat detection and response to threat prediction and prevention, we will help make organizations of all sizes more secure and resilient.”
Splunk heralds its unified security and observability platform as a way to secure digital systems with reduced downtime, faster remediation and the ability to get apps to market more quickly.
The resulting combination of Cisco and Splunk will create a software colossus that should be well-positioned to handle the increasingly complex world of generative AI.
Splunk’s role in Cisco: accelerating resilience
Gary Steele, president and CEO of Splunk, said that the acquisition by Cisco will accelerate his company’s mission to make organizations more resilient. “Together, we will form a global security and observability leader that harnesses the power of data and AI to deliver excellent customer outcomes and transform the industry,” he said. “We expect our community of Splunk employees will benefit from even greater opportunities as we bring together two respected and purpose-driven organizations.”
The impact of the deal on enterprises
Here’s where I see the acquisition having a real impact:
- Observability: With all the data it has and will continue to comb through, Splunk should help Cisco understand the behavior and performance of assets around an enterprise’s infrastructure and is highly complementary to ThousandEyes and AppDynamics.
- Generative AI: Training generative AI takes data — and lots of it. Cisco has AI capabilities but isn’t considered a market leader. Splunk is steeped in mountains of data, and these complementary capabilities should help Cisco make a bid as an enterprise AI platform versus a company that uses AI to enhance its products.
- Analytics: The combined companies should be able to extract critical data that will populate security analytics all the way from on-prem devices to apps and the cloud. Cisco wants to deliver more business insights to its customers and Splunk lets them see further up the stack.
- Hybrid cloud observability: Cisco will gain observability across hybrid and multi-cloud environments, enabling a more consistent user experience in a typically bumpy part of IT.
- Sustainability: Over the past few years, sustainability has gone from something C-level executives talked about to something they are measured on. One challenge for most organizations is they cannot track their progress toward it because of a lack of data. Both Cisco and Splunk have mature sustainability practices, and the combination of the two has arguably more data than anyone.
Although the long-awaited deal looks good on paper, this is, by far, the largest acquisition Cisco has ever made, significantly bigger than the $6.9 billion deal to buy Scientific Atlanta. Historically, Cisco has been the king of the technology tuck-in, where it takes a small, emerging company and drops it into its massive channel to scale. Larger deals require significantly more work to integrate as there are product, channel, sales, business model, and other issues.
On the positive side, there are numerous touchpoints where Cisco plus Splunk can create a “1+1= 3” effect, but Cisco will have to prioritize what it chooses to do and when to do it so as to not disrupt either business.
Transactions like this take a long time to close, and this one looks to be consummated in the third quarter of next year. A lot could change between now and then. At its core, this deal should be good for Cisco, Splunk and their respective customer bases. The potential is there making execution the key, which is an area of strength for Cisco.