Cisco makes largest ever acquisition, buying cybersecurity company Splunk for $28 billion in cash

• Cisco is acquiring cybersecurity firm Splunk for $157 per share in an all-cash deal.
• Cisco will finance the deal using a combination of cash and debt.
• The acquisition is by far Cisco's largest ever and deepens the company's bet on security software.

Cisco is acquiring cybersecurity software company Splunk for $157 per share in a cash deal worth about $28 billion, the company said Thursday, in its largest acquisition ever.

Splunk shares ended Thursday up 21%, while Cisco shares closed down 4%.

Splunk's technology helps businesses monitor and analyze their data to minimize the risk of hacks and resolve technical issues faster. Cisco has long been the world's largest maker of computer networking equipment and has been bolstering its cybersecurity business to meet customer demands and fuel growth.

Cisco CEO Chuck Robbins emphasized the importance of artificial intelligence and using the power of AI that comes with Splunk's technology to protect networks.

"Our combined capabilities will drive the next generation of AI-enabled security and observability," Robbins said, in a statement. "From threat detection and response to threat prediction and prevention, we will help make organizations of all sizes more secure and resilient."

The deal is expected to close in the third quarter of 2024, and Cisco says it should improve gross margins in the first year and non-GAAP earnings in year two.

The purchase price is equivalent to about 13% of Cisco's market cap, a big number for a company that has historically avoided blockbuster deals. Prior to Splunk, Cisco's biggest deal ever was the $6.9 billion purchase of cable set-top box maker Scientific Atlanta in 2006. At the time, Cisco's market cap was just over $100 billion.

But as the public cloud has gobbled more of Cisco's traditional back-end business, the company has needed to find new and big revenue streams. Cybersecurity has been the biggest bet.

In fiscal 2022, Cisco changed the name of its core switching and routing business from Infrastructure Platforms to Secure, Agile Networks, focusing on the need to have security built into networking gear. The company has a separate reporting unit called End-to-End Security, consisting specifically of security products.

Revenue in the core business climbed 22% in the fiscal year ended July 29, to $29.1 billion, and the security unit saw sales rise 4% to $3.9 billion.

Cisco shares have underperformed the Nasdaq this year, rising 12% while the tech-heavy index has jumped 27%. Over the past five years, it's been an even worse investment relative to the broader sector. The stock is up about 10% over that stretch, trailing the Nasdaq's 66% gain.

Robbins told CNBC's "Squawk on the Street" on Thursday that he expects organizational synergies between Cisco and Splunk to become clear within 12 to 18 months. The company will finance the deal with a combination of cash and debt, he said.

"Together, we will become one of the largest software companies globally," Robbins said in a conference call with analysts.

Following the announcement, some analysts raised concerns about potential product overlap, regulatory scrutiny and the price Cisco paid. Oppenheimer's Ittai Kidron noted on the call that Splunk's pivot to the cloud has been "underwhelming."

In recent years, Splunk turned away from an on-premises "customer-managed" approach to focus on a cloud-oriented offering.

Splunk CEO Gary Steele, who will join Cisco's executive team after the deal closes, said on the call with analysts that, "We still have many large customers who are very dependent upon the capabilities that we allow for in a customer managed environment."

Steele joined Splunk a little over a year ago. Prior to that, he was CEO of Proofpoint, a cybersecurity firm that was acquired by private equity firm Thoma Bravo in 2021 for $12.3 billion.

If Cisco backs out of the deal or if it's blocked by regulators, Cisco will pay Splunk a termination fee of $1.48 billion, according to a regulatory filing. Should Splunk walk away, it will pay a $1 billion breakup fee to Cisco.

In 2023, Cisco has acquired four companies focused on security: Armorblox, a threat detection platform; Oort, which does identity management; and Valtix and Lightspin, both in cloud security.

Tidal Partners, Simpson Thacher, and Cravath, Swaine & Moore advised Cisco. Qatalyst Partners, Morgan Stanley, and Skadden, Arps, Slate, Meagher & Flom advised Splunk.

WATCH: Cisco buys plunk for $28 billion