New York : Cisco Systems' $28 billion deal for Splunk is likely to spur other tech giants to splash out on similar acquisitions of software vendors with predictable subscription revenue, investment bankers and analysts say.
Splunk, a cyber security and data analytics firm, announced last week that it would sell itself to Cisco, making it the third-largest software acquisition of all time.
Chuck Robbins, the CEO of Cisco, has been expanding his company's offerings to compensate for its moribund telecommunications equipment business, saying that the $4 billion in annual recurring revenue that Splunk would bring from its subscriptions was a key factor in the deal.
Microsoft, Adobe and Oracle did not immediately respond to requests for comment.
The increasing outlook for software mergers and acquisitions is welcome boost for dealmakers, who have seen activity in the technology sector drop 61 per cent year-to-date to $231.5 billion in the first 8 months of 2023, according to LSEG data.
Private equity firms have been dominating the software industry over the past few years, with little competition from tech giants. In July, new Relic, a competitor of Splunk, agreed to be sold to private equity firms Francisco Partners and TPG Inc for $6.5 billion.
A rally in the Nasdaq 100 index this year and market fears of an economic recession receding will embolden technology firms to follow Cisco's example and spend on big acquisitions, said David Chen, co-head of global technology investment banking at Morgan Stanley.
In an interview, Chen said, outlook on their own business has really improved from four months ago and that gives confidence to pull the trigger on transformational transactions.
Jefferies analysts wrote in a note that the Federal Reserve's move to putting the brakes on interest rate hikes has given acquirers more confidence about their funding costs, helping dealmaking.
Even before Cisco's deal, there were signs that tech giants had begun to eye acquisitions of software firms this year, albeit at a smaller scale. IBM, for example, agreed in June to buy technology spend management platform Apptio for $4.6 billion.
Splunk's stock performance made it receptive to a takeover. While its shares had risen 39 percent in 2023 prior to the deal, they were still down 44 percent from their October 2020 peak, when the COVID-19 pandemic forced companies to spend more on information technology because most of their employees were working from home. Several of Splunk's peers have had similar stock performance.
Software stocks are inexpensive by historical standards, making them attractive acquisition prospects. The average software stock trades at 5.8 times projected 12-month revenue, 28 per cent below its 8-year historical average when excluding the impact of COVID-19, which temporarily buoyed valuations in the sector, Jefferies analysts said.
Cisco's deal valued Splunk at 7 times projected 12-month revenue, Jefferies said. They added that Cisco's price was reasonable.
Several BTIG analysts wrote in a note late last week.
Private software companies may be less receptive to takeovers. Keith Skirbe, management director in Houlihan Lokey's technology investment banking group, said that some companies that raised high valuations during the 2021 fundraising cycle prefer to be sold rather than be forced to raise money from their investors again at a lower valuation.
Wedbush analysts wrote in a note last week that the company's top trading partners were preparing for a deal.