Cisco Systems Inc. agreed to buy Splunk Inc. in a deal valued at about US$28 billion, representing its biggest acquisition yet and a massive push into software and artificial intelligence-powered data analysis.

Cisco will pay US$157 a share in cash, the companies said in a statement Thursday, or a 31% premium to Splunk’s previous closing price on Wednesday. The deal value represents roughly 10% of Cisco’s market value.

Shares of Cisco fell 2.8% in New York, and Splunk surged 21%.

Cisco has been expanding its software and services business in an attempt to rely less on its hallmark networking hardware. The Silicon Valley giant has traditionally generated the bulk of its revenue from equipment that forms the backbone of computer networks, but that’s been changing. Last month Cisco outlined the headway it’s making in artificial intelligence (AI) and security technology.

The deal is also arguably just as much a bet on AI as it is on the business of software and data security. Earlier this year, Splunk announced a new line of AI offerings that it said would, among other things, allow companies to detect and respond to anomalies in their data faster. The merger offers the companies’ AI products “substantial scale” and more visibility into data, they said in Thursday’s statement.

The combination will bring together the companies’ AI and security capabilities to help make organizations “more resilient and secure in an AI-powered world,” Cisco chief executive officer Chuck Robbins said in a blog post.

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The two companies had held talks in the past, but discussions fell apart last year, Bloomberg reported.

Woo Jin Ho, an analyst at Bloomberg Intelligence, described the acquisition as “the Moby Dick” of deals that’s been talked about for quite some time.

The acquisition could help Cisco find the recurring, subscription-based software revenues it has been seeking, Jin Ho said. Splunk, which can analyse the health of an underlying network in data centres and is moving to cloud-based products, would help Cisco manage the complexity of the cloud.

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As networks become more complex, he said, it “is crucial for companies to understand what’s really going on.”

Analysts at Vital Knowledge called the valuation “rich, but not extreme,” and noted that Cisco is buying a “reasonably healthy and thriving company.”

The Splunk acquisition is far bigger than Cisco’s takeover of Scientific Atlanta for about US$7 billion in 2006.

(Updated with share prices in third paragraph at 10.58 pm on September 21, 2023)

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