Cisco Systems Inc (NASDAQ:CSCO) recently offered over $20 billion to acquire Splunk Inc (NASDAQ:SPLK). However, they were not in active discussions.
Credit Suisse analyst Phil Winslow said he was "not surprised" by Cisco's reported interest in Splunk, especially considering the strategic fit of the latter with Cisco's existing IT security businesses and the prior acquisition of AppDynamics. Winslow said he has long viewed Splunk as a unique asset from a technology perspective.
In terms of both scale and growth, the company's revenue metrics are consistent with some of the most iconic companies in the software industry's history.
Winslow has an Outperform rating and a price target of $225 (81% upside) on Splunk's shares.
Morgan Stanley analyst Meta Marshall said she would view a potential deal or other strategic activity, at "recently more reasonable software valuations," as positive for Cisco.
A strategic activity could make sense to accelerate Cisco's software transformation. Despite its dominant position in multiple on-premise markets, Cisco's valuation has been held back by more gradual moves toward the cloud and the revenue transition, said Marshall.
She estimates that a deal for Splunk could accelerate Cisco's growth rate by about 90 basis points while pushing its subscription revenue mix "just above" 50%.
The analyst has an Equal Weight rating and a $61 price target (14.5% upside) on Cisco shares.
Raymond James analyst Adam Tindle considers the transaction inconsistent with Cisco's recently reaffirmed policy of "no large acquisitions," adding that the timing is "unusual" as both companies are in quiet periods ahead of January quarter results. Tindle, who made no change to his Market Perform rating, thinks Splunk is significantly undervalued at current levels.
Stifel analyst Brad Reback believes such a transaction would make sense for Cisco.
Splunk's assets would fit well with the AppDynamics Application Performance Management business Cisco previously bought in 2017 and broaden its high-margin, highly-recurring software revenue base. However, a quick sale for Splunk following Doug Merritt's departure late last year "would be an admission there is no easy fix" to the operational and strategic challenges the company has faced.
So he doesn't think any deal will happen in the near term. Reback has a Hold rating and a $125 price target on shares of Splunk.
Price Action: SPLK shares traded higher by 8.45% at $124.19 on the last check Monday.
