On the 21st of September, Cisco announced that it was acquiring the US software company Splunk for $28 billion. This is the 8th takeover bid for a company held in our fund since its creation and the 2nd since the beginning of the year, following Pfizer 's acquisition of Seagen in March. We would like to devote this Fund Insight to the significance and implications of a takeover bid of this scale in the global tech industry.
CISCO OFFERS A 31% CASH BONUS TO SPLUNK SHAREHOLDERS
On the 21st of September, Cisco announced that it was acquiring the North American software company Splunk for $28 billion, a 31% premium on the previous day's closing price. The deal, paid 100% in cash, values Splunk at an EV/Free Cash-Flow 2024e multiple of 25.7x or an EV/Sales ratio of 6.2x.
This is a great exit for Splunk shareholders (including our ODDO BHF ARTIFICIAL INTELLIGENCE fund). Although Splunk had recently begun to turn around its margins and cash flow under the leadership of its new CEO (Gary Steele, ex-CEO of Proofpoint), the company was continuing to lose market share, both to certain players in the observability market (Elastic, DataDog and Dynatrace, to name but a few) and in cybersecurity (such as Crowdstrike, which is nibbling away at Splunk's competitive positions in SIEM, which accounts for 75% of Splunk's total sales). Finally, Splunk's high pricing policy was criticised by many of its customers.
THE 5 LESSONS WE HAVE LEARNED FROM THIS OPERATION:
At $28bn, this M&A deal has a significant impact on US tech. Aside from the size of the deal, which is significant to say the least, we would like to make the following observations, which provide tangible confirmation of the trends we were anticipating:
a) Exponential growth in data driven by AI (in general) and Generative AI (in particular): Splunk is a player in the observability market, through its services in log analytics (i.e. monitoring connections to servers, computer programs and databases), application monitoring (i.e. monitoring the use of application software) and infrastructure (which relates to the architecture of computer systems). Cisco's interest in Splunk is therefore best understood as an interest in a segment of the software market that is growing structurally, as a result of the growth in data volumes. In fact, data volumes are growing rapidly, even exploding, driven by the growth of AI (and generative AI). We expect this expansion to continue in companies over the next 5 to 10 years.
b) Convergence between cyber-security and observability: Cisco is one of the world's top 5 leaders in the cyber-security market (in head-to- head competition with Fortinet, particularly in the firewall segment), while Splunk is one of the world's top five players in the observability market. The Cisco-Splunk merger reinforces our belief in the convergence between these two areas of cyber security and observability. Indeed, this was already apparent in the strategies of other players, such as Crowdstrike.
c) Hardware/Networking and Software AG convergence: the current era of exploding data volumes and artificial intelligence is also the catalyst for convergence between hardware, networking and software. The Cisco-Splunk deal is a perfect illustration of this, with Cisco's historical roots in hardware and Splunk's in software, and with both players involved in networking. Such convergence was already evident among players as diverse as Nvidia , Fortinet, Nutanix and SAP .
d) Consolidation to come in a software sector that is still fragmented in North America: after a record number of IPOs by North American software publishers in the pre-Covid years, the sector is now highly fragmented, with each generation of new publishers making its own contribution in terms of innovation. Following the example of the Cisco-Splunk merger, we are convinced that this sector is now ripe for consolidation, since:
Valuations have returned to reasonable levels: the sector is now trading on an EV/sales multiple of 6x, in line with the average of the last five years and well below the peak of 2021 (close to 18x).
The sector is particularly fragmented: it is easy to identify between 50 and 100 publishers listed on the US stock exchange. Private equity funds are likely to come forward: for example, funds such as Thoma Bravo, Vista, Permira and Silver Lake seem to consider the current stock market valuations of listed publishers to be attractive.
Some major tech players (e.g. Cisco) need to speed up their modernisation: the Cisco- Splunk deal is a tangible sign that the major technology groups also believe that current valuations are attractive. e) The existence of a "sweet spot" for M&A in the software sector: for obvious financial reasons, we believe that the "sweet spot" (i.e. the ideal characteristics) of an M&A transaction between listed software publishers is reached when both of the following conditions are met:
An Enterprise Value ("EV", i.e. market cap + net debt) between 2 and 7 billion dollars
An EV/sales multiple ("pre-deal", i.e. before application of the acquisition premium) of no more than 5x. While the Cisco-Splunk merger meets the second condition, this is not the case for the first one. In spite of this, the transaction can still be regarded as a deal of major significance in global tech.
