Splunk Big Data Means Priciest Deal Since 2008: Real M&A
The boom in big data means a takeover of Splunk Inc. (SPLK) could command the software industry’s highest price tag in five years.
Splunk, a maker of software that helps businesses sift through information generated by everything from websites and corporate networks to electronic tags for tracking inventory, has more than doubled since its debut as a publicly traded stock in April. The San Francisco-based company boasts a higher enterprise value relative to sales than 94 percent of similarly sized infrastructure software providers, according to data compiled by Bloomberg.
The $3.7 billion company would give an acquirer a leading position in the big data market, which IDC Corp. projects will almost triple in revenue to about $24 billion by 2016. While Splunk’s rich valuation limits the number of possible suitors, Susquehanna International Group LLP says EMC Corp. (EMC) or VMware Inc. (VMW) may be willing to pay up for it. Splunk also would be a good fit for International Business Machines Corp. (IBM), according to CLSA. Without assuming a premium, an acquisition of Splunk already would be the priciest software deal since 2008, data compiled by Bloomberg show.
“Price may be an obstacle, but strategically it’s very attractive,” Derrick Wood, a San Francisco-based analyst at Susquehanna, said in a telephone interview. “What they’re doing specifically, there are really no other vendors doing it of size.”
Splunk, the first of the so-called big data companies to go public, helps businesses monitor and analyze large sets of digital information from a variety of sources to improve service and reduce costs and security risks.
The company’s more than 5,000 customers span a variety of industries and include Comcast Corp., Monster Worldwide Inc., the U.S. Coast Guard and Moody’s Corp., as well as the states of Vermont and Nevada. In the fourth quarter, one of its customers, a technology company, placed a $20 million order, Splunk’s largest transaction yet. Its competitors range from small start- up firms to units of broader vendors such as Adobe Systems Inc., Google Inc. and IBM.
Splunk lacks “a direct competitor and they are out in the market displacing a lot of incumbents,” said Edward Maguire, a New York-based analyst at CLSA. “Splunk has technology that addresses a problem space in analytics. Most of the analytic and business intelligence apps we have so far deal with data that’s structured. But what you also have is this burgeoning area around what they call big data, or unstructured data.”
Software represented $1.9 billion of the revenue generated by the big data market last year, according to IDC. Splunk’s sales in the 12 months that ended in January equal about 10 percent of that. IDC estimates the entire big data market, which also includes hardware and services, will have almost $24 billion of revenue in 2016, versus $8.1 billion in 2012.
“Big data -- data will be the basis of competitive advantage for every company, every industry for the next decade,” Virginia Rometty, chief executive officer of IBM, said at the company’s annual shareholder meeting last month. “It’s going to drive IT. It’s going to drive our future, our industry. It’s going to drive business and society.”
Analysts project the increasing need for Splunk’s products will make it one of the fastest-growing infrastructure software companies, with sales climbing by an average 31 percent in each of the next two years, more than four times the industry’s median growth rate, estimates compiled by Bloomberg show.
Splunk’s growth prospects and unique offerings may attract EMC, VMware and Cisco Systems Inc. (CSCO), said Susquehanna’s Wood. Such a deal would be transformational for any of those companies and help them compete with traditional enterprise software companies like IBM, he said.
“It’s kind of a next-generation architecture,” Wood said. “Different competitors may do a slice of what Splunk does, but the fact that its platform goes across all sorts of different systems makes it pretty unique.”
Dave Farmer, a spokesman for Hopkinton, Massachusetts-based EMC, and San Jose, California-based Cisco’s Karen Tillman said the companies don’t comment on acquisition speculation. Joan Stone of VMware in Palo Alto, California, said she can’t comment on the company’s plans for takeovers.
Splunk would even be a “strategic fit” for IBM, the largest technology-services provider, because of its interest in big data, according to CLSA’s Maguire. IBM said last month that its goal is to reach $20 billion in annual sales from analyzing business data by 2015, double the amount that category generated in 2010.
James Sciales, a spokesman for Armonk, New York-based IBM, declined to comment on whether it’s considering an acquisition of Splunk.
Still, a deal for Splunk won’t be cheap and that could deter suitors, Maguire said.
“It’s expensive by any metric,” he said in a phone interview. The stock “feels like it’s priced in not only execution perfection but maybe even a little bit of an acquisition premium as well as a scarcity premium.”
With the shares up 121 percent since the initial public offering last year, Splunk’s equity and net debt is valued at about 17 times its trailing 12 months of revenue, topping 94 percent of its peers, data compiled by Bloomberg show.
Even before adding a takeover premium, an acquirer would be paying the steepest multiple for a software deal larger than $1 billion since 2008, the data show. That was the year Sun Microsystems Inc. bought MySQL AB for 39 times revenue.
Topeka Capital Markets Inc.’s Brian White estimates a bid for Splunk would need to be as much as $50 a share in order to get a deal done. That’s 33 percent higher than yesterday’s closing price of $37.56.
Today, Splunk shares gained 0.8 percent to $37.84.
“Given Splunk’s disruptive software platform, the company represents one of the few pure plays on the trend toward big data and could benefit leading IT vendors,” White wrote in a Jan. 16 note to clients.
Some technology providers in the past have been deemed so attractive that acquirers were willing to pay steep prices for them. VMware last year paid $1.26 billion in cash and equity for closely held Nicira Inc., which at the time of the deal had only recently shipped its first production-ready systems and had only about $10 million in sales, according to Wood.
“That was an astronomical multiple,” Wood said. “So if they think it’s something that’s that transformative and such an important technology for the future, they’re willing to pay up.”
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