OPINION

Chances are that unless you work in a particularly data-generative area of tech, you’ll never have heard of Splunk. It’s a company name that is regularly misspelt in a way that appeals to schoolboy
humour, but here’s the big deal: Cisco has put NZ$46.7 billion, all cash, on the table to buy the California-based software company.

Cisco is more of a global household name, having been in the networking and communications business since 1984. It’s part of the Nasdaq 100 and S&P 100 indices and, with a market capitalisation of NZ$363b, Cisco is simply enormous in the local context.

Splunk, in comparison, is much younger, having been founded in 2003, and smaller although still very large compared with New Zealand companies.

And it has something Cisco badly wants, namely the ability to churn through, index and visualise big data volumes for cyber security in particular, but also other applications like sensor information from Internet of Things (IoT) devices.

A data firehose is not heaps of use if you can’t extract useful information from it, and it’s not always apparent what that might be. Finding needles in data haystacks is what Splunk tries to do and it’s clearly worth huge amounts of money.

More importantly, Splunk has shifted its business to a subscription model and, as a result, has a decent-sized recurring revenue stream. That goes a long way towards explaining the huge amount of money Cisco is offering for Splunk, which is several times more than prior acquisitions the networking company has made over the past decade.

The tech sector copped a hangover as sales dried up after the world had bought enough gear and services to manage working from home during Covid lockdowns. Meanwhile, interest-rate rises and inflation hurting venture capital were causing startups to fall over in high numbers.

Nevertheless, the sheer volume of money sloshing around in tech at the moment beggars belief.

Many of you will have heard of Microsoft trying hard to push through the NZ$115b deal for popular Call of Duty game developer Activision Blizzard. However, semiconductor maker Broadcom’s $101b proposed purchase of hardware virtualisation vendor VMware is almost the same size.

Last year, Intel rival and chip maker AMD spent around $100b on Xilinx, a semiconductor company few will be aware of unless they’ve opened up devices and looked at the hardware inside them. Speaking of which, Japan tech conglomerate Softbank’s US sharemarket float of its UK chip designer Arm is going great shakes, with the latter company now being valued somewhere north of $110b.

Such deals are so big that competition regulators worldwide feel the need to scrutinise them closely, as they could put entire technology sectors out of whack and create monopolies.

Australia is also busy with tech mergers and acquisitions, albeit at a far smaller scale than in the US. French defence and tech giant Thales is buying security vendor Tesserent for around NZ$189 million and last year there were deals in the several hundreds of millions, although most of the acquisition activity involved much smaller amounts.

However, one of the bigger ones this year, Vocus buying TPG Telecom’s non-mobile fibre network assets for NZ$6.75b, looks like it might not eventuate, at least not the way it’s currently structured.

New Zealand is following a similar pattern to bigger markets and, with interest-rate hikes levelling off, some analysts have suggested in public that there’s a tidal wave of acquisitions coming up, due to FOMO (fear of missing out).

There are many good reasons for companies to merge, such as in scenarios where they provide services to customers that complement each other. Others involve companies buying what they don’t have and which would take a long time to develop, such as artificial intelligence know-how.

Some companies’ original businesses have run out of steam and investors push for M&As to bump up market share, or to buy growth for better returns – which are gambles that are not guaranteed to work. There are many examples of companies that are simply too culturally incompatible to become one entity, and customers’ acceptance of changes is never a given.

Meanwhile, the enormous money flows are creating concern. There are now suggestions that, with a merger frenzy on the cards and investor money drying up, private equity is heading down riskier paths.

Bloomberg reported recently that financing for buyouts involving high interest rates of 10 to 19 per cent is taking place, loans backed by promises of future income mainly. That’s down to exuberant demand currently, and it might work out, or we could be looking at another “what could possibly go wrong?” scenario if global economies hit a speed bump and lenders start seizing assets. One to watch out for, in other words.