{"id":65403,"date":"2023-09-25T22:28:29","date_gmt":"2023-09-26T02:28:29","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/ciscos-28-bln-spelunking-yields-dicey-deal\/"},"modified":"2023-09-25T22:28:33","modified_gmt":"2023-09-26T02:28:33","slug":"ciscos-28-bln-spelunking-yields-dicey-deal","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=65403","title":{"rendered":"Cisco\u2019s $28 Bln Spelunking Yields Dicey Deal"},"content":{"rendered":"
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By Breakingviews<\/em><\/p>\n

Sometimes a mud-covered object is a gem. Often, though, it\u2019s just quartz. That\u2019s the issue facing Cisco Systems (CSCO) after it announced on Thursday a $28 billion acquisition of big data and cybersecurity outfit Splunk (SPLK). The all-cash deal banks on Cisco drumming up growth \u2013 and the $215 billion networking giant assumes the risk for executing it.<\/span><\/p>\n

The company run by Chuck Robbins is looking to diversify away from its original business: selling hardware like routers and switches that connect computers and communication networks. Splunk in theory has enough to offer. Its software helps people monitor and search large pools of data. Ideally, Cisco\u2019s networking expertise and Splunk\u2019s ability to gain insights might yield cybersecurity products that can better predict attacks, say. Plus only about a third of Splunk\u2019s sales are international, while over 40% of Cisco\u2019s revenue comes from outside of the Americas. Cisco\u2019s marketing heft could expand Splunk\u2019s network and help it land more big contracts.<\/span><\/p>\n

The price is also potentially right. Cisco is paying about 7 times Splunk\u2019s estimated revenue over the next year, according to LSEG data. Even with a chunky 31% equity premium, that\u2019s slightly below Splunk\u2019s average valuation over the past five years.<\/p>\n

But Splunk may be relatively cheap for a reason. In 2020, the company, which had been growing its top line at 30% or above in previous years, hit a wall. It\u2019s cloud-based offerings were relatively slow to take off among customers. That is the main tenant of its growth strategy, but analysts only predict 12% overall expansion next year.<\/p>\n

Worse, Cisco didn\u2019t tout any cost savings from the deal. That may be a small part of a strategy to get around antitrust regulators, but its own shareholders aren\u2019t buying it. The company lost $10 billion of its value on Wednesday. At the statutory tax rate, the deal would represent about a 3% return on Cisco\u2019s investment. To earn a 10% return, it would have to nearly quadruple operating profit after-tax.<\/p>\n

If Cisco can bring back old growth rates and higher margins, then it could justify the deal in less than five years. But that seems tough for a company whose own top-line growth has slowed. The transaction is the largest Cisco has ever found. To bring forward a gem, though, it\u2019ll need to keep spelunking.<\/p>\n

Context News<\/h2>\n

Cisco Systems said on Sept. 21 it had agreed to buy Splunk for $157 a share in cash, or $28 billion, its biggest ever deal. That is a 31% premium to where shares in the software company closed on Sept. 20. Splunk makes software that monitors, searches and visualizes large collections of data.<\/p>\n

Original Post<\/p>\n

Editor’s Note:<\/strong> The summary bullets for this article were chosen by Seeking Alpha editors.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By Breakingviews Sometimes a mud-covered object is a gem. Often, though, it\u2019s just quartz. That\u2019s the issue facing Cisco Systems (CSCO) after it announced on Thursday a $28 billion acquisition of big data and cybersecurity outfit Splunk (SPLK). The all-cash deal banks on Cisco drumming up growth \u2013 and the $215 billion networking giant assumes […]<\/p>\n","protected":false},"author":1,"featured_media":65404,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[236],"tags":[83],"class_list":["post-65403","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-news","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nCisco\u2019s $28 Bln Spelunking Yields Dicey Deal | iFintechWorld<\/title>\n<meta name=\"description\" content=\"By Breakingviews Sometimes a mud-covered object is a gem. Often, though, it\u2019s just quartz. 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