In the fast-paced world of technology, market dynamics can change in the blink of an eye. A prime example of this rapid transformation is Cisco’s recent announcement of its acquisition of Splunk in a staggering $28 billion deal. This strategic move has sent shockwaves through the tech industry, and it’s crucial to understand the journey that led to this moment and the implications it holds for both companies.
The Rise and Fall of Splunk
To appreciate the significance of Cisco’s acquisition, we need to rewind to 2020. Splunk, at the time, was a dominant player in the security information and event management (SIEM) market. Its shares were soaring, reaching an all-time high. However, just two years later, in 2022, the company found itself in dire straits. It struggled to navigate the transition to the cloud, hemorrhaging money, and witnessing a sharp decline in its share price. During this turbulent period, rumors swirled that Splunk was in talks with Cisco for a potential acquisition, but those talks fizzled out.
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The Roller Coaster Resumes
Fast forward to the present, and Splunk’s fortunes have taken yet another twist. Cisco has made a bold move by announcing its acquisition of Splunk at $157 per share – a price that stands 30% higher than Splunk’s share value just the day before, yet almost 30% lower than its peak of $223 in September 2020.
What Transpired in Those Two Years?
In just two short years, the tech landscape has undergone significant changes. It’s imperative to dissect this journey comprehensively to gauge its implications for Cisco.
Splunk Cloud Odyssey
Like many tech companies in 2020, Splunk was riding high on the COVID-induced surge in cybersecurity technology investment, driven by remote work and the transition to the cloud. Splunk benefited from this trend, despite not being considered a major player in the cloud sector. However, it was in the early stages of transforming its on-premises data technology and its leading SIEM platform into a cloud-based service, including the Splunk Observability Cloud. This transition proved to be challenging as many of Splunk’s customers still clung to its on-premises SIEM solutions.
#SplunkNews: We’re excited to announce that Splunk and Cisco have agreed to join forces to create one of the largest software companies globally and realize our shared vision to keep organizations worldwide secure and resilient. Read more: https://t.co/ShOk00zL7y
— Splunk (@splunk) September 21, 2023
In late 2020 and early 2021, Splunk encountered roadblocks during this transition, missing earnings forecasts and causing investors to flee, resulting in a decline in its share price. The company was losing money as it grappled with the shift from an on-premises software licensing model to a cloud-hosted software-as-a-service (SaaS) model. Simultaneously, customers began questioning the high costs associated with SIEM, exploring alternative options. The once-promising market now seemed less of a sure bet.
In 2022, Splunk shifted gears, overhauling its management team and appointing tech veteran Gary Steele to steer the ship. Steele’s successful efforts to stabilize the company and restore its share price would ultimately lead to his inclusion in Cisco’s executive team.
Cisco’s Pursuit of ARR
Cisco’s interest in Splunk dates back to 2022 when rumors of an acquisition first surfaced. However, at that time, Splunk’s market capitalization exceeded $20 billion, making it a costly proposition for Cisco. Displaying financial discipline, Cisco chose to bide its time. In hindsight, this patience appears prescient, as Splunk’s declining fortunes paved the way for the current acquisition.
From a financial perspective, this acquisition makes eminent sense for Cisco. It will facilitate Cisco’s transition to annual recurring revenue (ARR), injecting nearly $4 billion into the company’s coffers. Cisco’s CEO, Chuck Robbins, exhibited prudence by waiting for the opportune moment. Splunk’s stock price, which had reached around $220 per share in 2020, made this deal far more attractive at $157 per share.
However, integrating Splunk into Cisco’s existing portfolio presents strategic challenges. Cisco customers have long voiced concerns about additional licensing costs associated with Cisco products, and Splunk’s SIEM is renowned for its expense. This could further cement Cisco’s reputation for maximizing revenue through cost increases for customers.
Additionally, questions loom over how Splunk will align with Cisco’s array of data observability platforms, including AppDynamics and ThousandEyes. Tough decisions lie ahead.
The SIEM Conundrum
One pivotal aspect of this acquisition is the fate of SIEM, a market undergoing heightened scrutiny and transformation. While Splunk once led the charge in on-premises SIEM, it lagged behind in cloud data services. Emerging players like Exabeam have entered the SIEM arena with modern “cloud-native” solutions, and customers are exploring cost-effective open-source alternatives for data management. Datadog, on the other hand, is a frontrunner in the data observability sector.
SIEMs grapple with the Herculean task of managing and analyzing colossal datasets. Splunk offered a bespoke, albeit costly, solution to this challenge. However, in an age of data overload, many cybersecurity professionals are seeking more efficient and automated data management approaches, including open-source cloud tools and alternatives.
For instance, a recent RSA Survey revealed that security teams feel overwhelmed by SIEM systems, desire enhanced automation. Approximately 30.9% of respondents admitted to not knowing how to add a new data source to their SIEM, and 21.89% relied on the data source provider to perform this task. A substantial 42.5% claimed that adding new data sources took weeks, months, or even longer. Only 19.74% of teams expressed high confidence in their SIEM’s ability to detect unknown threats, while 37.34% expressed moderate confidence.
The Road Ahead for Cisco
In the short term, Cisco gains a significant boost, propelling its annual ARR beyond $30 million. In the long run, the company faces the formidable challenge of enhancing Splunk’s cloud capabilities and SIEM positioning. In doing so, it must contend with industry giants like Datadog.
One group guaranteed to applaud this development is Splunk shareholders. The news of the acquisition has sent Splunk’s shares soaring, underlining the potential for this merger to shape the future of the tech industry.
Cisco’s acquisition of Splunk is a pivotal moment in the tech industry’s ever-evolving landscape.
