Cisco  has gained recognition for its strategy of expanding through acquisitions, although it has generally avoided pursuing exceedingly large ones. This morning, the company made a significant announcement of its $28 billion acquisition of Splunk.

Splunk offers an observability platform that seamlessly integrates with its security services, enabling customers to gain enhanced insights into security threats . Additionally, it assists in efficiently analyzing extensive log data, enabling the identification of system failures and troubleshooting a wide range of issues across multiple enterprise systems.

As part of the agreement, Cisco is shelling out a substantial amount of $157 per share. Splunk's stock has experienced a significant increase, indicating potential competition given its 52-week low of $65 per share and its consistent trading range in the high 80s and low 90s throughout the year. The recent market capitalization of the company hovers slightly above $20 billion.

As one would anticipate, the deal received enthusiastic praise from the chief executives of both companies. Cisco CEO and board chair, Chuck Robbins , particularly emphasized the involvement of artificial intelligence (AI) in this agreement, as is customary in today's business landscape, with a notable emphasis on cybersecurity. Together, our strengths will propel the advancement of AI-driven security  and observability in the future. "We aspire to enhance security and resilience for organizations of all scales, moving beyond threat detection and response to anticipate and prevent threats," stated Robbins.

In the meantime, Gary Steele, the president and CEO of Splunk, expressed his excitement about the vast potential created by the merger. "He stated that joining forces with Cisco marks the next stage of Splunk’s expansion, hastening their objective to assist global organizations in enhancing resilience and providing immediate and enticing benefits to shareholders." The deal is undoubtedly a source of gratification for the shareholders.

According to Ray Wang, the founder and principal analyst at Constellation Research, there is strong potential for a good fit between the two companies. Wang explained to TechCrunch that there is a distinct advantage in combining threat detection, security, and observability through AI.

"By prioritizing customer network security , Splunk gains significant value and enhances Cisco's AI narrative." Cisco's network telemetry, in combination with the Splunk observability platform, will provide customers with an extensive perspective on their data.

This year has been notably lacking in mergers and acquisitions, making this particular deal the standout enterprise software transaction of the year so far. In March, Silver Lake Partners acquired Qualtrics for a whopping $12.5 billion, surpassing all other deals.

The deal has been approved by both company boards; however, its regulatory approval is uncertain due to the increased scrutiny faced by such deals globally. The deal is expected to be finalized in the third quarter of the following year, assuming everything progresses positively according to the companies involved.

Cisco is focusing heavily on software, with acquisitions playing a significant role in driving this shift. According to S&P Capital IQ, the company has already made eight acquisition announcements this year.

According to certain evaluations, Cisco is incurring a substantial cost. Intelligently rephrase this passage: The deal assessed Splunk's worth at $157 per share, representing a 31 percent higher value than the Wednesday closing price and a 25 percent increase from the company's highest stock price over the past year. Cisco engaged in talks to acquire Splunk in the beginning of last year.

The announcement of the deal resulted in a 4 percent decline in Cisco's shares. Splunk's share price experienced an increase following the announcement, though it remained lower than the proposed acquisition price, indicating some investor apprehension regarding the deal's potential completion. One of the main considerations is whether the Biden administration's intensified scrutiny of major mergers will result in the approval of the transaction by antitrust regulators.

Behind closed doors, top-level corporate leaders have suggested that the recent obstacles faced by regulators, such as the unsuccessful attempt by the Federal Trade Commission to impede Microsoft's acquisition of Activision Blizzard for $70 billion, might facilitate the execution of future business transactions.

Innovative security measures and new sources of revenue

Cisco claims that the merger will enhance its revenue growth rate while maintaining its share buyback and dividend initiatives as previously stated. Moreover, Cisco's decision to acquire this company is motivated by the evolving environment in which it operates.

Cisco has been forced to explore fresh sources of income due to the significant impact of the public cloud on their traditional legacy technologies. Cisco has recognized the significance of cybersecurity and is focusing on it as a vital domain for expansion and investment in order to effectively adapt and flourish in a constantly changing industry landscape. This is also advantageous for Splunk, as the company has faced challenges in implementing cloud advancements for its security information and event management platform.

Before this announcement about Splunk, Cisco's most significant acquisition was the acquisition of Scientific-Atlanta in 2006. This purchase, which included cable set-top boxes, video distribution networks, and video systems integration, amounted to $7 billion. However, this acquisition only represented 7% of Cisco's total market capitalization.