Cisco (CSCO) is buying cybersecurity firm Splunk (SPLK) in a deal valued at around $28 billion. Cisco says the deal will "accelerate" the company's "business transformation" to becoming one with more recurring revenue.

Cisco aims to venture further into the AI market through the deal. According to CFO Scott Herren, "there's also an opportunity for us to build AI into our products and to enable our customers to leverage AI, and that's the real opportunity here," as Splunk's data source combined with Cisco's "security telemetry" presents a potential synergy.

Yahoo Finance Executive Editor Brian Sozzi interviews Cisco's CFO, Scott Herren, to discuss the details of the Splunk deal, Cisco's objectives in acquiring the company, and their confidence in the acquisition being an excellent match.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

BRIAN SOZZI: Cisco announced it will acquire cybersecurity leader Splunk in a deal worth approximately $28 billion. I'm joined by Scott Herren, Cisco's chief financial Officer. Scott, good to see you.

Just heard you on the investor call moments ago. Big deal. And I think your company is saying this is a historic deal for Cisco. Walk us through it.

SCOTT HERREN: Yeah, it's unusual when you get this kind of a great combination of two companies at scale where you have great product fit, great strategic fit, great cultural fit. The valuation is in line with what we expected and the financial details are tremendous for us. So it's an exciting day for us.

BRIAN SOZZI: It's also, I think, just a marker in your company's history in that you are now really in services. Your model is changing. How should an investor view Cisco. Not just a router company, you also have a lot of recurring revenue.

SCOTT HERREN: That's a really good point. And over the last several years, we've accumulated about $24 billion worth of annualized recurring revenue to your point on the services model. Splunk has that same model.

Splunk will bring another $4 billion of ARR to us, you know. So besides the great product fit and the opportunity to really help our customers move on the security side from detect and respond to predict and prevent ahead of time. So pretty exciting transaction.

BRIAN SOZZI: I love talking to CFOs on deal days because I can ask you, what are the synergies. Do you have a number? When this deal closes, how much in cost synergy, how much in revenue synergy? And is Splunk profitable?

SCOTT HERREN: Splunk is profitable. You know, Gary Steele came in as the CEO about 18 months ago and Gary and I have known each other for years. He's a tremendous operator and has done a great job, I think, over the last 18 months, kind of, focusing more on cost, focusing more on profitability, focusing on customers. And they've made some really key decisions that, I think, helped us get to the point where we are today of making this transaction.

It's an opportunity for us to not only drive the product synergies we've talked about and take their product set through our go to market channel. If you think of the global footprint that Cisco has, you know, Splunk's revenues today, Gary said on the call, roughly two thirds are still US, right? So the opportunity to take that technology and to leverage our footprint, something we're pretty excited about. We will do some additional investment to make that happen in both Europe and APGC. And yes, of course, we've got synergies, more top line synergies than there are cost synergies as we look forward.

BRIAN SOZZI: Yeah, is it more-- so this isn't a deal where you join forces and suddenly you put out a release saying you have hundreds of millions in cost synergies. This isn't that type of deal?

SCOTT HERREN: No, no, no, this is much more motivated by the top line synergies and acceleration we can get. And frankly, cash flow positive in year one after close, we do expect there to be a 9 to 12 month standard regulatory review. There's very little product overlap, so I don't think there's concern there. So when I talk about the cash flow positive in the first year post close, for us that's our fiscal 25. We expect this to close right around the beginning of our fiscal 25.

BRIAN SOZZI: So 9 to 12 month regulatory review, it was mentioned on that call Splunk has a little business in China. Do you need China's approval for this deal to close?

SCOTT HERREN: We do not. They've got a very, very small business in China, so that's not going to be an inhibitor to us.

BRIAN SOZZI: What's the big play here? Of course, we've been talking to you and I talked to your CEO Chuck Robbins a couple of weeks ago on generative AI. And you have already a big backlog, hundreds of million dollars in backlog. Is the play here to keep people's data secure as Gen I gets supercharged?

SCOTT HERREN: Yeah, you're spot on, Brian. Data is the key to AI, right, if you think about that. You need the data to train the models to get the value out of AI.

So what this gives us a chance to do, Splunk, of course, is a source of data for literally thousands of companies around the world. When you combine that with the network telemetry and the security telemetry that we have and with our AppD product, which gives you application monitoring, you can pull all that together in a very rich data set and then put an AI layer over the top of that. So it's not-- what you were talking about earlier is more selling AI infrastructure. There's also an opportunity for us to build AI into our products and to enable our customers to leverage AI and that's the real opportunity here.

BRIAN SOZZI: When you talk to customers and potential customers, is that their biggest fear with Gen AI that we're moving so fast and nobody's protecting the stuff?

SCOTT HERREN: I think everybody is still trying to figure out Gen AI beyond write a poem for my wife kind of thing in ChatGPT. There's no question that those large language models will have broad applicability across every company. And that applicability will come down to training the model. And training the model requires data and that's why this is such a powerful transaction for us.

BRIAN SOZZI: Isn't this the biggest deal that you've signed off on as CFO? What is that like?

SCOTT HERREN: This is definitely the biggest deal that I've signed off on as a CFO. And as you can imagine, we spent a lot of time on this. We've always been--

BRIAN SOZZI: It's been talked about for a while in various forums.

SCOTT HERREN: It was rumored, I think, if you go back. I mean, that was before Gary joined the company. But for a transaction this size, you know, we've always been disciplined.

We are an acquirer as a company. We've always been very disciplined and we were here as well. But we spend a lot of time on diligence, understanding the company, understanding the cultural fit, understanding the product fit, understanding the customer overlap and the opportunity to actually take this technology and build on top of it and take it more broadly across the planet.

BRIAN SOZZI: Before the pop in Splunk shares on this deal, about a 30% plus premium compared to Splunk's closing price yesterday if I did my math right. Hopefully, I did. What are they working on that is so exciting that you're paying a 30% premium?

SCOTT HERREN: Well, it's a company that, a, has great financial metrics, right? And again, I give Gary a lot of credit for the work that he's done to get it to that point. But we'll be cash flow accretive in the first year even with a transaction of this size.

And by the way, the metrics are right in line with precedent transactions. So you're right, it was about a 31% premium to the spot price yesterday. It was right in range on a 30-day VWAP multiple or premium and on a trailing 12-month revenue multiple. So right in line with standard metrics, but we can pull this in and be cash flow accretive in the first year with nominal EPS dilution immaterial in the first year.

BRIAN SOZZI: Does this change-- does this change how you buy back your stock? You've also been a voracious buyer back of a company buying back their stock. Do you change that?

SCOTT HERREN: I'm so glad you asked that question. It does not. And we said that on the call this morning, but I think it's a great point to reemphasize.

It doesn't change our dividend policy of steadily increasing that and it doesn't change our buyback. We've talked about keeping it at this elevated level of about $1.25 billion per quarter. We've talked about keeping it there. We'll continue to and that's the big advantage of being able to-- the strength of our balance sheet being able to do a transaction at this scale and have it be cash flow accretive in the first year post close.

BRIAN SOZZI: Was it tougher to do this or announce this deal today after a Fed meeting where the Fed chair said, basically, we're going to leave rates probably higher for longer. There's debt associated with this deal, right?

SCOTT HERREN: There will be as we get to close. It'll be a combination of cash and debt as we close.

BRIAN SOZZI: Are you worried about the returns you can drive from an acquisition like this? Let's say it closes later next year, in a land where rates are not being cut, and you have to fund this debt, and the economy might slow not just in the US but around the world.

SCOTT HERREN: I don't think so. As I talked to my peers, CFOs at other companies, I think we're all monitoring the environment. And I think it's a good time to be prudent. We're being prudent at Cisco. I think everyone else is being prudent.

But they're not stopping. They're not shutting down their business. They're not shutting down what they have to do to continue to grow their businesses, so no.

By the way, you can't ever time what's going to happen with the FOMC. So I would never try to do that and I don't think that's what you're suggesting. The overall macroeconomic environment is one that's not-- it's not super robust, but it's also not one that is causing a significant slowdown.

BRIAN SOZZI: What's your biggest challenge to integrating a $28-billion deal?

SCOTT HERREN: We'll spend a ton of time on that front. And I think one of the things that we really looked at during diligence is the strength of the leadership team that we're getting. The talent throughout the company is very strong. The leadership team is quite strong and that will obviously help us as we work through the integration process.

BRIAN SOZZI: Well, good luck on that integration process. Thanks for giving us time. Cisco CFO Scott Herren, you're about to be a very, very busy man, not that you weren't before.

SCOTT HERREN: Yeah, I wasn't playing a lot of golf before, Brian, and this is going to kill my golf.

BRIAN SOZZI: You absolutely will. All right, Scott, good to see you. Appreciate it.

SCOTT HERREN: Cheers, Brian. Thank you.