Software Front and Center for Mergers and Acquisitions

Cisco’s Biggest Bid

Technology giant Cisco (CSCO) made a bid to acquire software maker Splunk (SPLK) for more than $20 billion. According to reports, this would be the networking titan’s largest acquisition ever, dwarfing its 2021 takeover of Acacia Communications for $5 billion.

In September of last year, Cisco discussed its intention to focus on software and recurring revenue. Software sales made up 30% of the company’s revenue in 2021. Executives say they want to increase subscription sales from 44% of annual revenue to 50% by 2025.

Wall Street and Silicon Valley Eye Subscription Fees

Cisco’s bid is not only a big deal for the company, it’s also part of a much larger trend shaping both Wall Street and Silicon Valley. Both legacy companies like Cisco and private investors are showing an increased appetite for software that’s sold on a subscription basis. For example, Citrix Systems (CTXS) agreed to be taken private at a valuation of $16.5 billion. Two private equity firms are acquiring the company that sells cloud computing software.

Last summer, prior to this proposed deal with Cisco, Splunk announced a $1 billion investment from private equity firm Silver Lake. In keeping with the industry’s focus on subscriptions, Splunk has been pivoting away from the traditional software-licensing agreement model. Executives are more focused on cloud-based subscriptions that provide recurring revenue.

Part of a Larger Trend, but Regulatory Headwinds Could be On Horizon

Microsoft’s $68.7 billion acquisition of video game maker Activision Blizzard (ATVI) is another recent example of a legacy company making a major investment in the software space, this time in the video game sector. It represented the tech giant’s largest acquisition to date, outpacing the 2016 purchase of LinkedIn for $26.2 billion. Meanwhile, Oracle (ORCL) announced its biggest-ever deal in December of last year when it agreed to buy electronic-medical records company Cerner (CERN) for over $28 billion.

In 2021, $2.6 trillion worth of mergers took place in the US, representing a 76% jump from 2020. The recent flurry of deal making suggests 2022 could be on a similar trajectory, but one concern is regulatory hurdles. Some analysts cite increasing antitrust headwinds blowing in the face of big tech. Until concrete legislation is passed, it appears software companies will be prime targets for acquisitions moving forward.

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