What happened
Shares of data observability and security company Splunk (SPLK +0.00%) rose 19.5% this week through Thursday trading, according to data from S&P Global Market Intelligence.
It wasn't a mystery as to why the stock surged this week in spite of declines in the broader Nasdaq Composite. On Thursday, Splunk announced it had agreed to be acquired by tech giant Cisco Systems (CSCO +1.74%) at a hefty premium.
NASDAQ: SPLK
Key Data Points
So what
This isn't actually the first time Cisco had sought to buy Splunk. Back in February 2022, it was reported Cisco had made an offer of "over $20 billion" for Splunk. But apparently the two sides couldn't come to an agreement, especially as the tech sector was entering a bear market at the time.
But fast forward to today, with both Splunk and other tech stocks performing much better, and Cisco apparently felt comfortable upping its offer to $28 billion in cash, equating to $157 per share and a 31% premium to where Splunk was trading the day prior. In response, Splunk stock shot up to over $144 on the news, with an appropriate discount to the acquisition price, since it could be nearly a year before the deal closes.
Splunk's stock had already risen this year on prospects for better tech spending, as data-oriented companies have generally done well amid optimism for artificial intelligence (AI). Splunk has also been performing fairly well under CEO Gary Steele, who took over in early 2022. The company has beaten revenue and earnings expectations every quarter over the past year.
Still, the acquisition price is well below Splunk's all-time highs of $225 per share reached back in late 2020.
Splunk isn't as fast a grower as some of the newer-age cloud pure plays, as it's a bit of an older tech company. Still, Splunk's software is deeply embedded in many of the largest companies in the world, with 90% of the Fortune 100 using its security information and event management (SIEM) software suite.
The company has also made a successful transition from on-premise software sold in licenses to cloud-delivered software sold via subscriptions, proving that it can compete with newer competitors originated in the cloud that serve smaller and medium-size business. Last quarter, annualized recurring revenue grew a respectable 16%, with narrowing net losses under generally accepted accounting principles (GAAP) and growing, positive free cash flow.
Of course, a lot of that cash flow was taken up by Splunk's hefty stock-based compensation -- hence, why GAAP profits were negative. But Cisco should be able to cut overhead costs as it consolidates the company under its corporate umbrella.
Now what
Splunk's SIEM business fits in nicely with Cisco's existing application monitoring and cybersecurity businesses, and Cisco's international footprint could help Splunk grow overseas, where Splunk only gets one-third of its revenue. So, it looks like a decent deal all around, even if Cisco did pay a hefty premium.
Splunk shareholders should be feeling pretty good about the deal, as its stock rose to 52-week highs even as other tech stocks were falling this week amid interest rate fears.
