Cisco Made $20 Billion-Plus Takeover Offer for Splunk

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Should there be a deal, it would eclipse the roughly $7 billion acquisition of Scientific Atlanta in 2005. Its most recent deal of size was its nearly $5 billion purchase of Acacia Communications Inc. in 2021.

Splunk is currently searching for a chief executive after Doug Merritt stepped down from the role in November after roughly six years following a series of disappointing earnings reports. The company named Chairman Graham Smith as interim CEO, a position he still holds.

Splunk shares rose sharply early in the pandemic as did those of a number of other technology companies with strong growth potential, but have almost fallen in half since then.

The shares rose as much as 17% in after-hours trading after The Wall Street Journal reported on the potential deal.

It isn’t clear whether other potential suitors are circling Splunk.

Splunk, founded in 2003, makes software used by companies’ information-technology and security operations to monitor and analyze data.

San Jose, Calif.-based Cisco, run by Chief Executive Chuck Robbins, sells routers, switches and security services as well as software products such as its Webex meeting application. It already has a data-security partnership with Splunk.

In a sign of the increasing importance it places on software, Cisco in September said it would introduce new financial metrics and overhaul its reporting segments to showcase the growth of its software business.

The idea was to illustrate the company’s shift toward software and recurring revenue, Chief Financial Officer Scott Herren said at the time.

Software sales accounted for 30% of Cisco’s total revenue in fiscal 2021. The company said it wanted subscriptions to generate 50% of annual revenue in fiscal 2025, up from 44%. Cisco reported revenue of $49.8 billion for the year, up 1%. Net income was $10.6 billion, down 6%.

Cisco’s interest shows that the networking giant—a serial acquirer, but usually of smaller companies—has an appetite for big deals.

And it has the wherewithal, with a market value of around $230 billion and more than $20 billion in cash and short-term investments.

Software has been a hot corner of the M&A market lately, with a number of companies in the sector being snapped up by private-equity firms or other industry players. In one of the latest examples, Citrix Systems Inc. agreed to be taken private by a pair of private-equity firms in an acquisition valued at $16.5 billion, including debt.

Splunk said in June that technology-focused private-equity firm Silver Lake was making a $1 billion investment in the company to help support the transformation of the business. Splunk has been shifting from a traditional software-licensing arrangement to a cloud-based subscription model. An increase in the shares on news of that investment had evaporated by the close of trading Friday.

Cisco wouldn’t be the only legacy technology company making a big bet on growth through a flashy acquisition. Microsoft Corp. in January agreed to buy videogame maker Activision Blizzard Inc. for about $75 billion in what would be its largest acquisition by far. In December, Oracle Corp. agreed to buy electronic-medical-records company Cerner Corp. for more than $28 billion, in its biggest deal ever.

Cisco is set to report its fiscal second-quarter earnings Feb. 16, while Splunk reports March 2.

The deals punctuate a hot merger market as companies, especially technology concerns, use generally strong stock prices and big cash piles to scoop up rivals that can help them expand in desired areas.

There were $2.6 trillion of merger deals announced in the U.S. in 2021, up 76% from the prior year, according to Dealogic.

Overhanging the deals market is a fear the Biden administration may take a hard line on antitrust reviews of proposed transactions, but it’s not clear yet what its posture will be.

—Nina Trentmann contributed to this article.

Write to Dana Cimilluca at dana.cimilluca@wsj.com and Cara Lombardo at cara.lombardo@wsj.com