Analysis: Cisco's $28 billion Splunk deal may ignite software deal frenzy
26/09/2023 11:00
By Milana Vinn
NEW YORK, Sept 26 (Reuters) - Cisco Systems' CSCO.O
$28 billion deal for Splunk SPLK.O is likely to prompt other
technology giants to splash out on similar acquisitions of
software vendors with predictable subscription revenue,
investment bankers and analysts say.
Splunk, a cybersecurity and data analytics firm, was in the
process of shifting its business model from licensing its
software to charging for subscriptions when it announced an
agreement last week to sell itself to Cisco, making it the
third-largest software acquisition of all time.
Cisco CEO Chuck Robbins, who has been expanding his
company's services offerings to compensate for its moribund
telecommunications equipment business, told analysts that the $4
billion in annual recurring revenue that Splunk would bring from
its subscriptions was a key driver behind the deal.
This underscores how Splunk's subscription revenue-focused
peers, such as Elastic NV 3E1.F , Datadog DDOG.O , Crowdstrike
Holdings CRWD.O and Dynatrace DT.N , are potential
acquisition targets for technology conglomerates such as
Microsoft MSFT.O , Adobe ADBE.O and Oracle ORCL.N , which
are grappling with corporate customers seeking to cut spending,
the bankers and analysts said.
Microsoft, Adobe and Oracle did not immediately respond to
requests for comment.
The improving outlook for software mergers and acquisitions
is a welcome boost for dealmakers, which have seen activity in
the technology sector drop 61% year-to-date in the first 8
months of 2023 to $231.5 billion, according to LSEG data.
Dealmaking in the software sector has been dominated by
private equity firms over the past year facing little
competition from technology giants. New Relic NEWR.N , a Splunk
competitor, agreed in July to be sold to private equity firms
Francisco Partners and TPG Inc TPG.O for $6.5 billion.
David Chen, co-head of global technology investment banking
at Morgan Stanley MS.N , predicts that a rally in the Nasdaq
100 index this year and market fears of an economic recession
receding will embolden technology companies to follow Cisco's
example and spend on big acquisitions.
"I think the buyers' outlook on their own business has
really improved from four months ago, and that gives confidence
to pull the trigger on transformational transactions," Chen said
in an interview.
Jefferies analysts wrote in a note the Federal Reserve
putting the brakes on interest rate hikes has given acquirers
more certainty around their funding costs, helping dealmaking.
Even before Cisco's deal, there were some signs that
technology giants had started to eye acquisitions of software
firms this year, albeit at a smaller scale. IBM IBM.N , for
example, agreed in June to buy technology spend-management
platform Apptio for $4.6 billion.
ATTRACTIVE VALUATIONS
Splunk's stock performance made it receptive to a takeover.
While its shares had risen 39% in 2023 prior to the deal's
announcement, they were still down 44% from their October 2020
high, when the COVID-19 pandemic forced companies to spend more
on information technology because most of their employees were
working from home. Many of Splunk's peers have had similar stock
performance.
Software stocks are cheap by historical standards, making
them attractive acquisition targets. The average software stock
trades at 5.8 times projected 12-month revenue, 28% below its
8-year historical average when excluding the impact of COVID-19,
which temporarily buoyed valuations in the sector, according to
the Jefferies analysts.
Cisco's deal valued Splunk at 7 times projected 12-month
revenue, according to Jefferies. They and other analysts said
the price Cisco was paying was reasonable.
"We note that the typical security company with 20% growth
trades at about 7 times (sales)," BTIG analysts wrote in a note
last week.
Private software companies may also be more receptive to
takeovers. Keith Skirbe, managing director in Houlihan Lokey's
HLI.N technology investment banking group, said that some
companies that raised money at high valuations during the 2021
fundraising cycle prefer to be sold rather than be forced to
raise money from their investors again at a lower valuation.
"A tidal wave of software M&A (is) on the horizon," Wedbush
analysts wrote in a note last week.
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Software M&A pace likely to rebound after Cisco-Splunk deal
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(Reporting by Milana Vinn in New York
Editing by Anirban Sen and Anna Driver)
((Anirban.Sen@thomsonreuters.com; Twitter: @asenjourno; Reuters
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