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ETFs in Focus as Cisco Acquires Splunk in $28 Billion AI-Deal

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IP-based networking company Cisco Systems (CSCO - Free Report) has announced its acquisition of cybersecurity heavyweight, Splunk (SPLK - Free Report) , for a staggering $28 billion. This huge deal marks Cisco's most significant move to bolster its software business and leverage the surge in artificial intelligence.

The deal is anticipated to close by the end of the third quarter in 2024. However, some analysts have expressed concerns about potential antitrust issues due to overlapping security businesses. If finalized, the Splunk acquisition would be Cisco's largest in nearly four decades.

Strategic Move Away from Hardware

The acquisition looks to lower Cisco's dependence on its vast networking equipment sector, which has been beleaguered by supply chain disruptions and a post-pandemic decline in demand.

Chuck Robbins, Cisco's CEO, emphasized the merger's focus on security and observability, two sectors where companies are less likely to cut costs due to the severity of cybersecurity threats, per Reuters, as quoted on Yahoo Finance. The stock has a good Growth score of “A” and moderate Value score of “C.”

Inside Splunk's Strength

Splunk, which currently has a Zacks Rank #1 (Strong Buy), specializes in data observability, aiding companies in overseeing their systems for cybersecurity threats. Operating on a subscription-based pricing model, Splunk's impressive clientele includes giants like Coca-Cola, Intel, and Porsche. Despite an impressive revenue growth spurt last year, Splunk faced a demand dip in 2023, mainly due to higher interest rates. The stock has a good Growth and Momentum score of “B.”

Inside the Synergy of the Deal

Cisco already has a data-security partnership with Splunk. This acquisition is likely to boost Cisco's revenue growth and gross margin in the subsequent fiscal year post-acquisition. Post-acquisition, Cisco expects an addition of $4 billion in annual recurring revenue. Should the deal collapse, Cisco would be obligated to pay Splunk a hefty termination fee of $1.48 billion.

Inside the Deal

Previously, merger discussions between the two tech giants were initiated but did not come to fruition. The current deal has Cisco paying $157 cash per Splunk share, a 31% premium to Splunk's recent closing price. Post the announcement of the deal, Splunk shares jumped 20.8% on Sep 21, 2023.

ETFs in Focus

Against this backdrop, investors should focus on ETFs that are heavy on Cisco and Splunk.

Cisco has 18% weight in iShares U.S. Telecommunications ETF (IYZ - Free Report) , 8.5% weights in iShares North American Tech-Multimedia Networking ETF (IGN - Free Report) and 6.2% in Pacer Data and Digital Revolution ETF (TRFK - Free Report) .

Splunk has decent weights (in the range of 5.4% to 4.5%) in ETFs like ProShares Big Data Refiners ETF (DAT - Free Report) , ETFMG Prime Cyber Security ETFMG Prime Cyber Security Fund (HACK - Free Report) and Future Fund Active ETF (FFND - Free Report) .

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