After at least a year of near radio silence in tech mergers and acquisitions, Cisco is shelling out $28 billion for Splunk, indicating the current premium on cybersecurity and AI. It's also record-setting as Cisco's largest acquisition ever.
It's safe to say that deals are getting done again.
"Despite lackluster large software M&A YTD, we believe [Cisco's $28 billion bid for Splunk] could unlock more M&A," Jefferies analyst Brent Thill wrote on Sept. 24. "Despite higher interest rates, we believe the Fed pause on rate increases could provide more funding visibility for players that might have been on the sidelines. This positive development around M&A should support multiples."
It's a lot to hope for amid the tough macroeconomic environment that tech M&A — and M&A across the board — has weathered. In the first half of 2023, global M&A was down 38% as compared to the same time frame in 2022, according to data from Refinitiv.
However, the environment might be shifting for the better. For software companies, which historically have been active acquirers, the sector's solid 2023 in the public markets could start to make room for M&A again as rate hikes ease and companies look for inorganic growth to buy and build on.
"Software stocks have had a great year thus far ... outperforming the S&P 500 up 13%," Thill wrote. "The outperformance has been driven by four factors: ... macro impact was not as severe as expected, expectations that AI developments will drive a new build and investment cycle, valuations that had been driven down to historical lows, and fund flows returned to tech from other sectors."
In August, Yahoo Finance reported that, according to bankers, the hottest sectors for tech deals were cybersecurity and AI. The Cisco-Splunk deal encapsulates both, suggesting there's room to run for deals in both sectors.
But don't get too hyped on the idea of this Splunk megadeal kicking off a wave of equally giant acquisitions.
Looking ahead, investors can expect more deals valued in the tens or hundreds of millions of dollars or perhaps even deals in the low billions. Though it's possible to do deals in high interest rate environments, more expensive capital can put a damper on some excitement.
Additionally, getting giant deals over the finish line remains tough. Even though Cisco and Splunk will likely be able to squeak by, it isn't exactly a winning regulatory landscape for other deals at this scale.
"From a regulatory perspective, we see limited risk given minimal product overlap (within the observability portion of Splunk's portfolio) though we would be remiss not to acknowledge today's regulatory environment and the impact that could have on timing of deal closure," wrote Deutsche Bank analyst Brad Zelnick on Sept. 22.