⚖️ For Fairness Sake ⚖️ Splunk acquired by Cisco for $28 billion in equity value
A quick look at Splunk's fairness opinion
Splunk acquired by Cisco for $28 billion in equity value.
The PREM14A with the fairness was filed on 18 Oct 23 and we are missing some data that may get filled in. I will likely update this post as we get more data.
Splunk / Cisco deal overview
San Jose and San Francisco, Calif., September 21, 2023 — Cisco (NASDAQ: CSCO) and Splunk (NASDAQ: SPLK), the cybersecurity and observability leader, today announced a definitive agreement under which Cisco intends to acquire Splunk for $157 per share in cash, representing ~$28 billion in equity value.
The Per Share Merger Consideration constituted a premium of ~31% over Splunk’s closing stock price of $119.59 on September 20, 2023 (the trading day prior to the public announcement of the Merger), and a premium of ~38% over Splunk’s 30-day volume-weighted average closing share price through that date.
Termination fee of $1,000,000,000
Reverse termination fee of $1,478,000,000
Advisors:
Cisco
Tidal Partners LLC is acting as a financial advisor
Simpson Thacher & Bartlett LLP serves as legal counsel
Cravath, Swaine & Moore LLP is the regulatory counsel
Splunk
Qatalyst Partners and Morgan Stanley & Co. LLC are acting as financial advisors
Skadden, Arps, Slate, Meagher & Flom LLP is serving as legal counsel.
Background of the merger
TL;DR: November 15, 2021, Splunk underwent significant leadership changes as CEO Doug Merritt stepped down, prompting Graham Smith, Chair of the Board of Directors, to take the interim CEO position. Shortly after, Cisco expressed interest in acquiring Splunk, offering a series of bids starting at ~$165 per share, eventually reaching $193 per share in February 2022. Splunk countered with a proposal of $212 per share, leading to Cisco withdrawing its interest. In March 2022, Gary Steele was appointed as the new President and CEO. Cisco reinitiated discussions in April 2023, making an offer of $130 per share in cash on June 20, 2023, which Splunk found was less attractive than Splunk’s standalone business plans and long-term value prospects. Splunk ran a negotiated process with only Cisco, no market check was run. The subsequent back-and-forth negotiations, lead to a final offer on August 31, 2023, at $157 per share, with the execution of the merger agreement on September 21, 2023.
Offer timeline
The wringer
Splunk filed a PREM14A on 18 Oct 23 that contained Qatalyst’s and Morgan Stanley’s fairness opinions. The initial submission is missing a good amount of key financial data need to recreate the analysis, we will see if Investors sue to get more disclosure.
Under the terms of its engagement letter, Qatalyst Partners provided the Company with financial advisory services in connection with the Merger for which it will be paid an amount currently estimated at ~$68.0 million, $7.5 million of which was payable upon delivery of its opinion (regardless of the conclusion reached in the opinion), and the remaining portion of which will be paid upon, and subject to, the closing of the Merger.
Splunk has agreed to pay Morgan Stanley an aggregate fee of ~$45 million, ~$7.5 million of which was earned following delivery of the opinion and the remainder of which is contingent upon the consummation of the Merger. In addition, upon the closing of the Merger, Morgan Stanley may receive additional value resulting from adjustments to the 2027 Base Capped Call Transaction between Morgan Stanley and Splunk entered into in connection with Splunk’s issuance of 2027 Convertible Notes.
This works out to ~0.24% and ~0.16% of the ~$28 billion equity value respectively, which would probably be at the higher end of M&A sell-side fee tables.
For its fee, Qatalyst goes with the standard valuation methods.
Trading comparables
Transaction comparables
DCF
For its fee, Morgan Stanley goes mostly with the standard valuation methods and some other for reference.
Trading comparables
Transaction comparables
DCF
Discounted Equity Value Analysis
Other
Illustrative Precedent Transaction Premiums
Historical Trading Ranges
Equity Research Analysts’ Future Price Targets
A few caveats before we begin diving into the numbers. I am not going to be able tie out all the share price ranges due to several factors:
Financials projections are rounded to the ones
Quarterly projections not provided
A full option schedule was not provided in any filings
Do not have detailed financials to calculate CY or NTM financials
Do not have levered free cash flow projections
Do not have make-whole costs associated with the remaining outstanding convertible notes and estimated unwind values related to the treatment of Splunk’s outstanding Capped Call Transactions
Again, the old saying still applies, “you get what you pay for” and this is free. That said, we are in the ballpark for all analysis, so let’s dive in.
Valuation Summary
Is it Fair?
As my Anesthesiologist used to say, only God and the Delaware Courts can decide that.
Both Qatalyst and Morgan Stanley have very wide valuation ranges and the offer price of $157 would be near the middle to top of the majority of those ranges
Although closer to the bottom of Morgan Stanley’s Transaction comps based on LFLF and Discounted Equity analysis ranges
~31% premium over Splunk’s closing stock price of $119.59 on September 20, 2023 (the trading day prior to the public announcement of the Merger), and a premium of ~38% over Splunk’s 30-day volume-weighted average closing share price through that date.
26% premium to 52 week high
Ran a negotiated process with only one party and no formal market check was initiated
No inbound interest from other parties regarding a strategic transaction was noted following prior press reports of Splunk’s discussions with Cisco in 2022
Management projected financials
Discounted Cash Flow Analysis
Qatalyst Partners
Performed an illustrative discounted cash flow analysis, which is designed to imply a range of potential per-share present values for Splunk common stock as of July 31, 2023 (which is the end of the Company’s most recent completed fiscal quarter and most recent publicly available balance sheet date), with respect to each of the Baseline Management Projections, the Sensitivity 1 Projections and the Sensitivity 2 Projections, by:
adding:
the implied net present values of the estimated future unlevered free cash flows (which are referred to as the “UFCF”) of the Company based on each of the Baseline Management Projections, the Sensitivity 1 Projections and the Sensitivity 2 Projections, as applicable, for the third quarter of fiscal year 2024 through fiscal year 2034 (which implied present values were calculated using a range of discount rates of 12.0% to 14.0%, based on an estimated weighted average cost of capital for the Company);
the implied net present value of a corresponding terminal value of the Company, calculated by applying to the Company’s estimated UFCF in fiscal year 2034 based on each of the Baseline Management Projections, the Sensitivity 1 Projections and the Sensitivity 2 Projections, as applicable, a perpetuity growth rate range of 3.0% to 5.0% (which was chosen based on Qatalyst Partners’ professional judgment and experience), and discounted to present value using the same range of discount rates used in item (a) above; and
subtracting:
net debt, as of July 31, 2023 (including ~$42 million of non-current investments and pro forma for the paydown of the Company’s 2023 Notes, due on September 15, 2023), as provided by management of the Company; and
dividing the resulting amount by the number of fully diluted shares of Splunk common stock outstanding (calculated using the treasury stock method, taking into account the restricted stock units, performance-based restricted stock units, and in-the-money stock options) as of September 18, 2023, all as provided by management of the Company, with each of the above-referenced estimated future UFCFs and terminal values having also been adjusted for the degree of estimated dilution to current Splunk Stockholders through each respective applicable period (approximately 2% annually throughout the projection period) due to the estimated net effects of equity issuances and cancellations related to future equity compensation, which estimates of future dilution were provided by management of the Company.
Based on the calculations set forth above, this analysis implied a range of values for Splunk common stock as follows:
Morgan Stanley
Morgan Stanley utilized estimates from the Management Projections for purposes of its discounted cash flow analysis, as more fully described below.
Morgan Stanley first calculated the estimated unlevered free cash flow, which is defined as non-GAAP adjusted earnings before interest, taxes, depreciation and amortization (unburdened by stock-based compensation), (i) less taxes, (ii) less stock-based compensation expense, (iii) less capital expenditures, (iv) less capitalized deferred commissions, (v) plus amortization of deferred commissions, (vi) plus or minus changes in deferred revenue, and (vii) plus or minus changes in net working capital, for calendar years 2023 through 2033, which estimated unlevered free cash flow were provided for Morgan Stanley’s use by Splunk’s management. The free cash flow and terminal value were discounted to present values as of September 19, 2023, at a discount rate ranging from 11.6 percent to 13.5 percent. To calculate terminal values, Morgan Stanley utilized perpetual growth rates of 3.0 percent to 5.0 percent. The resulting aggregate value was then adjusted for net debt.
Based on the outstanding shares of Splunk common stock on a fully diluted basis as provided by Splunk’s management as of September 18, 2023, Morgan Stanley calculated the estimated implied value per share of Splunk common stock as follows:
Selected Companies Analysis
Qatalyst Partners
The companies used in this comparison were those companies listed below, which were selected by Qatalyst Partners in its professional judgment, based on factors including that they are publicly traded companies in similar lines of business to the Company, have a similar business model, have similar financial performance or have other relevant or similar characteristics.
Based upon third-party research analyst consensus estimates as of September 19, 2023, and using the closing prices as of September 19, 2023, for shares of the selected companies, Qatalyst Partners calculated, among other things, the fully diluted enterprise value divided by (i) the consensus revenue estimates for calendar year 2024 (which are referred to as the “CY24E revenue multiples”) and (ii) the consensus levered free cash flow estimates for calendar year 2024 (which are referred to as the “CY24E LFCF multiples”), for each of the selected companies, as shown below:
Based on an analysis of the CY2024E revenue multiples for the selected companies, Qatalyst Partners selected a representative multiple range of 4.0x to 7.0x. Qatalyst Partners then applied this range to the Company’s revenue estimates for fiscal year 2025, based on each of the Baseline Management Projections, the Management Sensitivities and the Street Estimates. For purposes of this analysis, Qatalyst Partners used the Company’s fiscal year ending January 31, 2025, as a proxy for calendar year 2024.
Based on an analysis of the CY2024E LFCF multiples for the selected companies, Qatalyst Partners selected a representative multiple range of 15.0x to 27.0x. Qatalyst Partners then applied this range to the Company’s levered free cash flow estimates for fiscal year 2025, based on each of the Baseline Management Projections, the Management Sensitivities and the Street Estimates. For purposes of this analysis, Qatalyst Partners used the Company’s fiscal year ending January 31, 2025, as a proxy for calendar year 2024.
Based on the fully diluted shares of Splunk common stock outstanding as of September 18, 2023 (calculated utilizing the same methodology as used in the above discounted cash flow analysis), this analysis implied a range of values for Splunk common stock as follows:
Morgan Stanley
Morgan Stanley reviewed and compared certain financial estimates for Splunk with comparable publicly available consensus equity analyst research estimates as of September 19, 2023, for companies, selected based on Morgan Stanley’s professional judgment and experience, that share similar business characteristics and have certain comparable operating characteristics including, among other things, similarly sized revenue and/or revenue growth rates, market capitalizations, profitability, scale and/or other similar operating characteristics (the “comparable companies”).
Morgan Stanley analyzed (1) the ratio of price (“P”) for each of the comparable companies to estimated levered free cash flow (“LFCF”) for calendar year 2024 and (2) the ratio of aggregate value (“AV”) for each of the comparable companies utilizing publicly available financial information as of September 19, 2023, to estimated revenue for calendar year 2024. Morgan Stanley refers to these ratios as “AV/CY2024E Revenue Multiple” and “P/CY2024E LFCF Multiple,” respectively. For purposes of its analyses, Morgan Stanley defined (a) “aggregate value” as a company’s fully diluted equity value plus total debt, less cash and cash equivalents and equity investments, (b) “levered free cash flow” as a company’s operating cash flow, less capital expenditures and (c) “price” as a company’s closing stock trading price on September 19, 2023.
The following is a list of the selected comparable companies reviewed, together with the applicable P/CY2024E LFCF Multiple:
Based on its analysis of the relevant metrics for each of the comparable companies and upon the application of its professional judgment and experience, Morgan Stanley selected representative ranges of AV/CY2024E Revenue Multiple of 4.0x-6.0x and P/CY2024E LFCF Multiple of 15.0x-25.0x and applied these respective ranges to Splunk’s estimated revenue and estimated levered free cash flow for calendar year 2024 based on each of the Research Case and the Management Projections, respectively.
Based on the outstanding shares of Splunk common stock on a fully diluted basis as of September 18, 2023, and cash and debt balances as of July 31, 2023, each as provided by Splunk’s management, and certain adjustments to the debt balance based on (i) maturity and subsequent repayment out of cash of Splunk’s 0.50% Convertible Senior Notes due 2023, (ii) make-whole costs associated with the remaining outstanding convertible notes, and (iii) estimated unwind values related to the treatment of Splunk’s outstanding Capped Call Transactions prepared by Morgan Stanley and reviewed and approved for Morgan Stanley’s use by Splunk’s management, Morgan Stanley calculated the estimated implied value per share of Splunk common stock as follows:
Selected Transactions Analysis
Qatalyst Partners
Qatalyst Partners compared sixty-eight selected public company transactions, including transactions involving companies participating in similar lines of business to the Company or with similar business models, similar financial performance or other relevant or similar characteristics.
For each of the selected transactions listed below, Qatalyst Partners reviewed, among other things, (a) the implied fully diluted enterprise value of the target company as a multiple of third-party research analyst consensus estimates of the next-twelve-months’ revenue of the target company (which are referred to as the “NTM revenue multiples”), (b) the implied fully diluted enterprise value of the target company as a multiple of third-party research analyst consensus estimates of the next-twelve-months’ EBITDA of the target company (which are referred to as the “NTM EBITDA multiples”), and (c) the implied fully diluted equity value of the target company as a multiple of third-party research analyst consensus estimates of the next-twelve-months’ levered free cash flow of the target company (which are referred to as the “NTM LFCF
Based on the analysis of the NTM revenue multiples for the selected transactions and its professional judgment, Qatalyst Partners selected a representative multiple range of 4.5x to 8.0x, then applied this range to the Company’s next-twelve months’ revenue estimates (calculated as the four quarters ending on July 31, 2024) based on the Street Estimates. Based on the fully diluted shares of Splunk common stock outstanding as of September 18, 2023 (calculated utilizing the same methodology as used in the above discounted cash flow analysis) as provided by management of the Company, this analysis implied a range of values for Splunk common stock of ~$97.37 to $178.26 per share.
Based on the analysis of the NTM EBITDA multiples for the selected transactions and its professional judgment, Qatalyst Partners selected a representative multiple range of 18.0x to 34.0x, then applied this range to the Company’s next-twelve-months’ EBITDA estimates (calculated as the four quarters ending on July 31, 2024) based on the Street Estimates. Based on the fully diluted shares of Splunk common stock outstanding as of September 18, 2023 (calculated utilizing the same methodology as used in the above discounted cash flow analysis) as provided by management of the Company, this analysis implied a range of values for Splunk common stock of ~$88.22 to $172.96 per share.
Based on the analysis of the NTM LFCF multiples for the selected transactions and its professional judgment, Qatalyst Partners selected a representative multiple range of 20.0x to 32.0x, then applied this range to the Company’s next-twelve-months’ leveraged free cash flow estimates (calculated as the four quarters ending on July 31, 2024) based on the Street Estimates. Based on the fully diluted shares of Splunk common stock outstanding as of September 18, 2023 (calculated utilizing the same methodology as used in the above discounted cash flow analysis) as provided by management of the Company, this analysis implied a range of values for Splunk common stock of ~$107.27 to $171.63 per share.
Morgan Stanley
Morgan Stanley performed a precedent transactions multiples analysis, which is designed to imply a value of a company based on publicly available financial terms. Morgan Stanley compared publicly available statistics for selected technology transactions by reviewing technology company transactions larger than $5 billion in aggregate value since 2011 (the “Selected Technology Transactions”). Morgan Stanley selected such comparable transactions based on its professional judgment and experience, including because they shared certain characteristics with the Merger, most notably because they were similar technology transactions since 2011. For such transactions, Morgan Stanley noted the multiple of aggregate value of the transaction to the estimated next 12 months’ (“NTM”) revenue and the multiple of the transaction price to the NTM levered free cash flow, in each case, based on publicly available information at the time of announcement or at the unaffected date of each such transaction.
The following is a list of the selected technology transactions reviewed, together with the applicable multiples:
Based on its analysis of the relevant metrics and time frame for each of the transactions listed above and upon the application of its professional judgment and experience, Morgan Stanley selected representative ranges of the price to the estimated NTM levered free cash flow multiples and the aggregate value to the estimated NTM revenue multiples of these selected technology transactions, respectively, and applied these ranges of multiples to Splunk’s estimated NTM levered free cash flow and estimated NTM revenue, respectively, based on the Research Case to calculate a range of implied equity values per share of Splunk common stock. The following table summarizes the results of Morgan Stanley’s analysis:
Discounted Equity Value Analysis
Morgan Stanley performed a discounted equity value analysis, which is designed to provide insight into a theoretical estimate of the potential future equity value of a company as a function of such company’s estimated future revenue and a range of trading multiples. The resulting estimated future implied equity value is subsequently discounted to arrive at an illustrative estimate of the implied present value for the company’s theoretical future implied stock price. In connection with this analysis, Morgan Stanley calculated a range of implied present equity values per share of Splunk common stock on a standalone basis for each of the Research Case and the Management Projections, respectively.
To calculate these discounted fully diluted equity values, Morgan Stanley utilized calendar year 2026 revenue estimates under each of the Research Case and the Management Projections, respectively. Based upon the application of its professional judgment and experience, Morgan Stanley applied a forward range of price to estimated levered free cash flow multiples (based on such multiples for the comparable companies) and aggregate value to estimated revenue multiples (based on such multiples for the comparable companies) to these levered free cash flow and revenue estimates, respectively, in order to reach a future-implied fully diluted aggregate value and equity value, respectively. For each of the Research Case and the Management Projections, Morgan Stanley applied a price to estimated levered free cash flow multiple range of 15.0x to 25.0x and an aggregate value to estimated revenue multiple range of 4.0x to 6.0x, each to generate an undiscounted implied future fully diluted equity value.
In each case, Morgan Stanley then discounted the resulting implied future fully diluted equity value to September 19, 2023, at a discount rate of 12.9 percent, which rate was selected by Morgan Stanley based on Splunk’s estimated cost of equity, estimated using the capital asset pricing model method and utilizing a 6 percent market risk premium, a risk-free rate of 4.3 percent based on the 10-year U.S. Treasury yield as of September 19, 2023, and a 1.43 predicted beta per Barra. The results of this analysis are listed below:
Other Information
Morgan Stanley
Morgan Stanley observed additional factors that were not considered part of Morgan Stanley’s financial analysis with respect to its opinion but were noted as reference data for the Board of Directors.
Illustrative Precedent Transaction Premiums
Morgan Stanley performed an illustrative precedent transactions premiums analysis on the Selected Technology Transactions. For these transactions, Morgan Stanley noted the distributions of the following financial statistics, where available: (i) the implied premium to the acquired company’s closing stock price on the last trading day prior to announcement (or, as applicable, on the last trading day prior to the stock price being affected by acquisition rumors or similar merger-related news); and (ii) the implied premium to the acquired company’s 30-trading day average closing stock price prior to announcement (or, as applicable, on the last trading day prior to the stock price being affected by acquisition rumors or similar merger-related news).
Based on its analysis of the premia for such transactions and based upon the application of its professional judgment and experience, Morgan Stanley selected (1) a representative range of premia and applied such range to Splunk’s closing Splunk common stock price on September 19, 2023, and (2) a representative range of premia and applied such range to Splunk’s unaffected 30-trading day average closing Splunk common stock price on September 19, 2023. The following table summarized the results of Morgan Stanley’s analysis:
Historical Trading Ranges
Morgan Stanley noted certain trading ranges with respect to the historical stock prices of Splunk common stock for the 30-day and 365-day periods ending on September 19, 2023. Morgan Stanley observed the following:
Equity Research Analysts’ Future Price Targets
Morgan Stanley noted certain future public market trading price targets for Splunk common stock prepared and published by equity research analysts and provided to Morgan Stanley by Splunk management on August 30, 2023, which excluded reports published prior to Splunk’s release of its earnings results for the second fiscal quarter of 2023 and where no future public market trading price target was indicated. These targets reflected each analyst’s estimate of the future public market trading price of Splunk common stock. The range of undiscounted analyst price targets for Splunk common stock was $105.00 to $150.00 per share. Morgan Stanley then discounted the range of analyst price targets per share for Splunk common stock by one year at a rate of 12.9 percent, which was the discount rate selected by Morgan Stanley, upon the application of its professional judgment and experience, to reflect Splunk’s cost of equity, estimated using the capital asset pricing model method and utilizing a 6 percent market risk premium, a risk-free rate of 4.3 percent based on the 10-year U.S. Treasury yield as of September 19, 2023, and a 1.43 predicted beta per Barra. This analysis indicated an implied range of fully diluted equity values for Splunk common stock of $93.00 to $133.00 per share.
Background of the Mergers
On November 15, 2021, Doug Merritt, Splunk’s Chief Executive Officer, stepped down and Graham Smith, Chair of the Board of Directors, was appointed Interim Chief Executive Officer. Following this announcement, Splunk’s stock price declined from $167.82 per share on November 12, 2021, to $137.38 on November 15, 2021. Following such date and over the course of the ensuing several months, Splunk began its search for a permanent Chief Executive Officer.
On November 19, 2021, Chuck Robbins, Chair and Chief Executive Officer of Cisco, contacted Mr. Smith regarding Cisco’s potential interest in exploring a strategic combination with Splunk and inquired whether it would be possible to discuss the topic with Mr. Smith. On December 15, 2021, Mr. Smith spoke with Mr. Robbins and Mr. Robbins reiterated Cisco’s interest in a potential transaction involving Splunk. No terms, including price, with respect to any potential transaction were discussed.
On December 17, 2021, Splunk received an unsolicited non-binding indication of interest from Cisco to acquire Splunk for $165 to $175 per share in cash. Cisco’s indication of interest was subject to a number of conditions, including completion of its due diligence review of Splunk and finalization of definitive agreements for the proposed transaction. On December 21, 2021, Cisco supplemented its December 17th proposal with a letter to Splunk requesting access to certain key non-public diligence information regarding Splunk in order to allow Cisco to continue to evaluate its offer.
Over the ensuing several weeks, at Cisco’s request, representatives of Cisco and Splunk discussed publicly available information relating to Splunk’s business, operations and outlook. During this period of time, Splunk was also continuing its search for a permanent Chief Executive Officer and began to consider and work with Gary Steele as a candidate for this role.
On January 14, 2022, Splunk received a revised non-binding indication of interest from Cisco to acquire Splunk for $175 to $190 per share in cash, again subject to a number of conditions including completion of Cisco’s due diligence review of Splunk and finalization of definitive agreements for the proposed transaction.
On January 23, 2022, Cisco and Splunk entered into a customary confidentiality agreement (the “Confidentiality Agreement”) in order to facilitate their discussions and information sharing. The Confidentiality Agreement included a customary “standstill” provision but did not include a so-called “don’t ask, don’t waive” provision. Over the next several weeks, representatives of Cisco and Splunk continued to discuss Splunk’s business, operations and outlook. Also, in January 2022, the Board of Directors engaged Qatalyst Partners and another financial advisor to, among other things, assist Splunk in evaluating strategic alternatives for Splunk, including a possible sale of Splunk. Qatalyst Partners was selected by the Board of Directors based on its qualifications, expertise, reputation, and its knowledge of Splunk’s business and the industry in which it operates, to act as Splunk’s financial advisor.
On February 4, 2022, Splunk received a revised non-binding indication of interest from Cisco to acquire Splunk for $193 per share in cash, again subject to a number of conditions including completion of Cisco’s due diligence review of Splunk and finalization of definitive agreements for the proposed transaction.
On February 6, 2022, Mr. Smith spoke with Mr. Robbins by telephone and Mr. Smith verbally conveyed a counterproposal of $212 per share in cash.
Later that day, Cisco withdrew its indication of interest citing several key factors that would prevent Cisco from being able to move forward with a proposed transaction at the time, including the potential challenges of further exploring a transaction while Splunk was simultaneously finalizing its search for a permanent Chief Executive Officer and making other significant senior management changes.
Following such withdrawal, Splunk and Cisco ceased all transaction-related communications and information sharing and, on February 9, 2022, Splunk sent Cisco a request for return or destruction of confidential information received by Cisco pursuant to the Confidentiality Agreement. On February 24, 2022, representatives of Simpson Thacher & Bartlett LLP (“Simpson”), outside counsel to Cisco, certified the completion of such return and destruction on behalf of Cisco pursuant to the Confidentiality Agreement.
On February 11, 2022, various news outlets in the U.S. reported that Cisco and Splunk had been discussing a potential business combination transaction valuing Splunk at over $20 billion. Neither Cisco nor Splunk commented publicly on these news reports.
Throughout the remainder of 2022 and early 2023, Splunk announced several significant management changes. In March 2022, Splunk announced that Mr. Steele would join the company as its new President and Chief Executive Officer and that its President and Chief Growth Officer was resigning.
In addition to management changes, Splunk lowered its outlook in 2022. On August 24, 2022, Splunk announced its second quarter of its fiscal year 2023 results adjusting down guidance for Splunk’s total annual recurring revenue from $3.9 billion to $3.65 billion and cloud annual recurring revenue from $2 billion to $1.8 billion.
Between December 17, 2021 and April 4, 2023, the Nasdaq declined by 19%, the S&P Services and Software index declined by 25% and Splunk’s stock price declined by 15%.
On April 4, 2023, Scott Herren, Cisco’s Executive Vice President and Chief Financial Officer, contacted Mr. Steele to arrange a telephone call. On the call, Mr. Herren indicated that Cisco was impressed with the composition and performance of Splunk’s new management team and the business progress that Splunk had made since the parties ended transaction discussions in February 2022. Mr. Herren further indicated that Cisco was interested in reengaging with Splunk to explore a potential acquisition of the company if Splunk was open to such discussions. Mr. Steele indicated that he would discuss the matter with Splunk’s Board of Directors and let Mr. Herren know if the Board of Directors was willing to re-engage in potential transaction discussions. Following his call with Mr. Herren, Mr. Steele informed Mr. Smith, Chair of the Board of Directors of Splunk, of his call with Mr. Herren and also consulted with Morgan Stanley, Splunk’s long-standing financial advisor, on among other things, deal negotiations, business diligence matters, and potential next steps and responses to Mr. Herren.
On April 9, 2023, Following a discussion of Splunk’s business outlook and key strategic initiatives, conditions in Splunk’s key businesses, the macro-economic environment in general, and the state of the capital markets, as well as Splunk’s prior engagement with Cisco the previous year, the Board of Directors authorized and instructed Splunk’s management team to engage with Cisco in order to determine whether there was a path to a transaction that would be in the best interests of Splunk Stockholders. Given the extent of the information that Splunk had previously shared with Cisco during the companies’ prior transaction discussions, the Board of Directors also authorized and instructed the management team to update Splunk’s long-term financial forecasts and share a similar level of confidential information with Cisco to ensure that any renewed discussions regarding a potential transaction would be informed by information that reflected Splunk’s then-current business, products, technology and financial outlook.
On April 11, 2023, Mr. Steele called Mr. Herren to inform him that the Splunk Board of Directors had authorized and instructed Mr. Steele and his management team to engage in preliminary discussions with Cisco regarding a potential transaction and, in furtherance thereof, to provide Cisco with confidential information on its business and operations in order to determine whether a potential transaction was in the best interests of Splunk Stockholders. Mr. Herren expressed Cisco’s appreciation and, on April 12, 2023, Mr. Herren sent Mr. Steele a list of preliminary information requests, including a request to meet certain members of Splunk’s senior management team.
On April 26, 2023, Cisco and Splunk entered into an amendment to the Confidentiality Agreement to extend the term thereof in order to facilitate their discussions and information sharing.
On May 2, 2023, the Board of Directors convened a meeting to discuss the status of Splunk’s engagement with Cisco. Members of Splunk’s management team and a representative of Skadden also attended the meeting. Mr. Steele updated the Board of Directors on Splunk’s recent engagement with Cisco, including Cisco’s request for Splunk’s current financial forecasts. Messrs. Steele and Roberts noted that, consistent with the Board of Directors’ previous authorization and in anticipation of Cisco’s request for current financial forecasts, Splunk’s management team had prepared preliminary financial forecasts for Splunk’s 2024, 2025 and 2026 fiscal years (the “Interim Management Projections”). Mr. Roberts presented the Interim Management Projections and described the methodology and the material assumptions the management team used to create the Interim Management Projections. The Board of Directors discussed the Interim Management Projections and authorized and instructed the management team to share them with Cisco. The Board of Directors then discussed the status of Splunk’s engagement with Cisco and remained supportive of continued discussions with Cisco in order to determine if Cisco would present Splunk with a compelling transaction proposal.
Between May 3, 2023 and June 19, 2023, representatives of Splunk and Cisco held several additional information sharing meetings to advance discussions on Splunk’s business, technology, operations and outlook.
On June 19, 2023, Mr. Steele and Mr. Robbins met in person. During the meeting, Mr. Robbins expressed appreciation for Splunk’s recent business performance and the efforts of Splunk’s new management team. Mr. Robbins also indicated that Cisco would be sending Splunk a non-binding indication of interest to acquire Splunk for $130 per share in cash. Mr. Steele expressed his appreciation for Cisco’s interest and Mr. Robbins’ proposal and indicated that he would discuss the matter with the Board of Directors once Splunk had received Cisco’s written proposal.
On June 20, 2023, Splunk received a non-binding indication of interest from Cisco to acquire Splunk for $130 per share in cash, representing a premium of 20% to Splunk’s closing stock price of $108.02 on June 16, 2023.
On June 21, 2023, The members of the Board of Directors discussed their initial reactions to Cisco’s proposal, which generally reflected the view that Cisco’s offer price was less attractive than Splunk’s standalone business plans and long-term value prospects. Given Splunk’s previous discussions with Cisco in 2021 and 2022, however, the Board of Directors concluded that Splunk should continue to engage with Cisco to determine whether Cisco could be encouraged to present a more compelling offer.
Due to the fact that Splunk had received an actual transaction proposal from Cisco at this time, the Board of Directors also discussed whether it would be prudent to establish a committee of the Board of Directors to allow for flexible and timely oversight and support of management in its discussions with Cisco under circumstances where it might not be practicable to frequently assemble the full Board of Directors. After discussion, the Board of Directors approved the formation of a committee (the “Transaction Committee”), comprised of Graham Smith, Kenneth Hao, David Tunnell and Rick Wallace, to facilitate the Board of Directors’ active involvement in Splunk’s discussions and consideration of strategic alternatives, including potential negotiations with Cisco (or any other party), but without authority to approve any transaction or the terms and conditions thereof. The Transaction Committee was not created to address any actual or perceived conflict of interest, and the members of the Transaction Committee were not paid any additional compensation for serving on the Transaction Committee. The Board of Directors also discussed the need to retain a financial advisor to conduct financial analyses of any proposal or proposed transaction (and the terms and conditions thereof), to assist Splunk in negotiations and to help the Board of Directors evaluate strategic alternatives. After discussion, the Board of Directors determined to engage Qatalyst Partners and Morgan Stanley based on their respective pre-existing relationships with Splunk, including Qatalyst Partners’ engagement during the discussions with Cisco in 2022 as well as its knowledge of Splunk and Morgan Stanley’s long-standing relationship advising Splunk since its initial public offering and ongoing strategic dialogue with Splunk, as well as their respective reputations, expertise and experience advising enterprise software companies in connection with transactions of a similar nature. The Board of Directors authorized and instructed the management team to negotiate the terms of these engagements, subject to review and approval of the Board of Directors or the Transaction Committee.
On June 27, 2023, the Transaction Committee met to consult with representatives of Qatalyst Partners and Morgan Stanley regarding Cisco’s acquisition proposal. Members of Splunk’s management team (including Mr. Steele) and representatives of Skadden also attended the meeting. Representatives of Qatalyst Partners and Morgan Stanley together reviewed their preliminary financial analyses of Cisco’s $130 per share acquisition proposal. After considering the preliminary financial analyses presented by representatives of Qatalyst Partners and Morgan Stanley, the Transaction Committee concluded that Cisco’s $130 per share offer price was not compelling but that Splunk should continue to engage in discussions with Cisco to determine whether there was a path to a transaction that was in the best interests of Splunk and its stockholders.
At this meeting, the Transaction Committee also discussed whether Splunk should conduct a “market check” to determine if any other third parties might have interest in a strategic transaction with Splunk at this time. To determine whether the Transaction Committee should conduct a “market check,” representatives of Qatalyst Partners and Morgan Stanley together reviewed a list of third parties that might have strategic interest in a transaction with Splunk based on their respective business profiles and expressed strategic plans and initiatives, as well as an ability to execute a transaction with a company with a market capitalization as large as Splunk’s. Members of the Transaction Committee and Mr. Steele discussed each of the potential acquirors identified and determined, based on their business insights and the advice of Qatalyst Partners and Morgan Stanley, that none of these parties were likely to have interest in pursuing a strategic transaction with Splunk at this time or in the near future, given among other things, the size of the transaction, other strategic priorities of strategic buyers at the time that would prevent them from pursuing such large-scale M&A opportunities. Members of the Transaction Committee actively involved in private equity investing observed that financial sponsors were unlikely to have interest in a transaction with Splunk for a variety of reasons, including the size of the transaction, Splunk’s financial profile and the then-current market conditions for leveraged acquisition financing. The Transaction Committee also noted that Splunk had not received any inbound interest from third parties in a strategic transaction with Splunk following the above-mentioned press reports of Splunk’s strategic discussions with Cisco in 2022. After such discussions, including consideration of the potential downsides of a market check, the Transaction Committee determined not to initiate a market check at this time.
At the end of the meeting, members of the Transaction Committee and Mr. Steele discussed potential responses to Cisco with representatives of Qatalyst Partners and Morgan Stanley and the appropriate means by which to convey Splunk’s response. Following this discussion, members of Splunk’s management team (including Mr. Steele) departed the meeting so the Transaction Committee could meet in executive session with representatives of Qatalyst Partners, Morgan Stanley and Skadden.
On June 29, 2023, based on guidance and instruction from the Transaction Committee, Mr. Steele called Mr. Robbins to convey Splunk’s feedback on Cisco’s $130 per share acquisition proposal. Mr. Steele informed Mr. Robbins that Splunk’s Board of Directors and management team were confident in Splunk’s standalone business prospects and that Cisco’s proposed offer price of $130 per share did not reflect a price for Splunk that was more attractive than Splunk’s standalone business prospects and long-term value. Mr. Robbins acknowledged Splunk’s response and requested additional information on Splunk’s business, technology and financial outlook in order to help Cisco refine its financial model for a potential acquisition of Splunk, including potential synergies that might be unlocked by a strategic combination of the two companies. Mr. Steele suggested the companies’ financial advisors discuss the matter further.
On July 5, 2023, a representative of Tidal Partners LLC (“Tidal Partners”), Cisco’s financial advisor, spoke with a representative of Qatalyst Partners and informed that Cisco would consider making a revised offer to acquire Splunk but needed additional diligence information from Splunk in order to determine whether to do so, and if so, what revised offer price to propose. In particular, Cisco was interested in better understanding Splunk’s technology, products and platform. The Tidal Partners representative indicated that Cisco would send a supplemental information request list to Splunk in order to focus Splunk’s information gathering efforts in support of Cisco’s financial modeling work.
On July 10, 2023, the Transaction Committee convened a meeting to discuss the status of Splunk’s engagement with Cisco. Members of Splunk’s management team (including Mr. Steele) and representatives of Skadden, Qatalyst Partners and Morgan Stanley also attended the meeting. Mr. Steele updated the Transaction Committee on the management teams’ recent discussions with Cisco, including Mr. Steele’s conversation with Mr. Robbins and Cisco’s request to receive additional information to enable it to refine its business and financial analysis of a business combination with Splunk. While Mr. Robbins had not committed to revise Cisco’s offer price, he had requested the additional information to assess whether doing so was feasible. The Transaction Committee supported Splunk’s efforts to compile and share the supplemental information that Cisco had requested and authorized and instructed Splunk to do so. Following this discussion, members of Splunk’s management team (including Mr. Steele) departed the meeting so the Transaction Committee could meet in executive session with representatives of Qatalyst Partners, Morgan Stanley and Skadden. After some discussion, representatives of Qatalyst Partners and Morgan Stanley also departed the meeting so that the members of the Transaction Committee could discuss the terms of Qatalyst Partners’ and Morgan Stanley’s engagement, including the respective relationship disclosure letters previously provided by each of Qatalyst Partners and Morgan Stanley to the Board of Directors. After discussion, the Transaction Committee determined to authorize and instruct Splunk to formally engage both Qatalyst Partners and Morgan Stanley on the terms discussed, subject to completion of certain engagement details.
Following review and approval by the Transaction Committee of the negotiated engagement letters with each of Qatalyst Partners and Morgan Stanley, Splunk entered into a formal engagement letter with Qatalyst Partners on August 3, 2023, and a formal engagement letter with Morgan Stanley on August 16, 2023.
On July 31, 2023, Splunk completed the second quarter of its fiscal year 2024. Following the completion of the quarter, Splunk’s management team (1) refined its preliminary projections of Splunk’s fiscal year 2024 financial results as included in the Interim Management Projections based, in part, on the full year outlook implied by the second quarter results (as updated, including certain projections of Splunk’s financial results for fiscal years 2027 through 2034 prepared by Splunk’s management by extrapolating from the foregoing financial projections, the “Updated Interim Management Projections”) and (2) prepared two additional sets of alternative long-term financial projections in order to give the Board of Directors a broader perspective on possible alternative financial outcomes if macroeconomic factors impacted near-term growth and if growth rates slowed more rapidly over time (the “Sensitivity Cases”). Splunk’s management team also discussed its second quarter financial results with representatives of Cisco to explain the management team’s views on the implications of these results for Splunk’s full fiscal year 2024 estimates. Following this meeting, Splunk shared a revised fiscal year 2024 forecast with Cisco.
Following this further refinement, Splunk publicly reported its second quarter financial results on August 23, 2023. The earnings announcement reported that Splunk’s (1) total annual recurring revenue was $3.858 billion, up 16% year-over-year; (2) total revenues were $911 million, with cloud revenue growing 29% to $445 million; (3) GAAP operating expenses declined 2% year-over-year; (4) non-GAAP operating expenses declined 3% year-over-year; (5) trailing twelve-month operating cash flow was $827 million, up 247% year-over-year; (6) trailing twelve-month free cash flow was $805 million, up 273% year-over-year; and (7) number of customers with total ARR greater than $1 million was 834, an increase of 111 year-over-year. Following the earnings announcement, Splunk’s closing stock price increased from $99.93, as of the close of trading on the day of the earnings announcement, to $112.83, as of the close of trading on the day after the earnings announcement.
On August 25, 2023, Splunk received a revised non-binding indication of interest from Cisco to acquire Splunk for $142 per share in cash, representing a premium of 26% to Splunk’s closing stock price of $112.83 on August 24, 2023.
On August 27, 2023, the Transaction Committee convened a meeting to discuss the status of Splunk’s engagement with Cisco. Members of Splunk’s management team (including Mr. Steele) and representatives of Skadden, Qatalyst Partners and Morgan Stanley also attended the meeting. At the request of the Board of Directors, representatives of Qatalyst Partners and Morgan Stanley together reviewed their preliminary financial analyses of Cisco’s $142 per share acquisition proposal based on publicly available information and Splunk’s management team’s Updated Interim Management Projections and Sensitivity Cases. The Transaction Committee considered and discussed the preliminary financial analyses and concluded that Cisco’s revised offer price of $142 per share continued to undervalue Splunk and was less attractive than Splunk’s standalone business and long-term value prospects. After discussion, the Transaction Committee authorized and instructed Qatalyst Partners, on behalf of Splunk, to deliver to Tidal Partners, on behalf of Cisco, a counterproposal for Cisco to acquire Splunk for $168 per share in cash. Following this discussion, members of Splunk’s management team (including Mr. Steele) departed the meeting so the Transaction Committee could meet in executive session with representatives of Qatalyst Partners, Morgan Stanley and Skadden.
Later that day, a representative of Qatalyst Partners verbally presented the counterproposal of $168 per share in cash to a representative of Tidal Partners.
On August 28, 2023, a representative of Tidal Partners called a representative of Qatalyst Partners and verbally conveyed a revised proposal by Cisco to acquire Splunk for $146 per share in cash, reflecting a premium of 25% to Splunk’s closing stock price of $117.15 on August 28, 2023.
On August 29, 2023, the Transaction Committee convened a meeting to discuss Cisco’s latest acquisition proposal as conveyed by Tidal Partners. Members of Splunk’s management team (including Mr. Steele) and representatives of Skadden, Qatalyst Partners and Morgan Stanley also attended the meeting. Representatives of Qatalyst Partners and Morgan Stanley together reviewed the verbal counterproposal for Cisco to acquire Splunk for $146 per share in cash that Tidal Partners had conveyed the previous day and representatives of Qatalyst Partners and Morgan Stanley together reviewed, at the request of the Board of Directors, their preliminary financial analyses of the proposal based on publicly available information and the Updated Interim Management Projections and Sensitivity Cases. A representative of Skadden also gave the Transaction Committee a preliminary assessment of the regulatory considerations of the proposed transaction and reviewed the directors’ fiduciary duties in connection with their evaluation of a potential sale of Splunk in general and Cisco’s interest in particular. The Transaction Committee considered and discussed the preliminary financial analyses and concluded that Cisco’s revised offer price of $146 per share continued to undervalue Splunk and was less attractive than Splunk’s standalone business and long-term value prospects. After discussion, the Transaction Committee authorized and instructed Qatalyst Partners to deliver a counterproposal to Tidal Partners of $160 per share in cash. Following this discussion, members of Splunk’s management team (including Mr. Steele) departed the meeting so the Transaction Committee could meet in executive session with Splunk’s outside financial and legal advisors. Later the same day, a representative of Qatalyst Partners called a representative of Tidal Partners to convey that the Transaction Committee would be prepared to accept (and recommend to the full Board of Directors to accept) a revised offer to acquire Splunk at a transaction price of $160 per share in cash.
On August 30, 2023, Mr. Robbins called Mr. Steele to discuss the proposed transaction. During the call, Mr. Robbins presented a revised proposal for Cisco to acquire Splunk for $152 per share in cash, reflecting a premium of 26% to Splunk’s closing stock price of $120.28 on August 30, 2023.
Later that day, the Transaction Committee convened a meeting to discuss Cisco’s latest acquisition proposal. Members of Splunk’s management team (including Mr. Steele) and representatives of Skadden, Qatalyst Partners and Morgan Stanley also attended the meeting. At the meeting, representatives of Qatalyst Partners and Morgan Stanley together reviewed their preliminary financial analyses with respect to Cisco’s latest proposal to acquire Splunk for $152 per share in cash based on publicly available information and the Updated Interim Management Projections and Sensitivity Cases. Following the discussion, the Transaction Committee authorized and instructed Mr. Steele to inform Mr. Robbins that the Transaction Committee would be prepared to support (and would recommend to the full Board of Directors to accept) a transaction price of $158 per share in cash. The Transaction Committee agreed to reconvene following Mr. Steele’s conversation with Mr. Robbins. Following this discussion, members of Splunk’s management team (including Mr. Steele) departed the meeting so the Transaction Committee could meet in executive session with Splunk’s outside financial and legal advisors.
Later that same day, Mr. Steele called Mr. Robbins and Mr. Steele indicated that the Transaction Committee was prepared to accept (and recommend to the full Board of Directors to accept) a transaction price of $158 per share in cash.
Later that evening, a representative of Tidal Partners called a representative of Qatalyst Partners to preview that Mr. Robbins would again call Mr. Steele to convey another revised verbal proposal to acquire Splunk. Mr. Robbins called Mr. Steele by telephone that evening and indicated that Cisco would be prepared to acquire Splunk for $156 per share in cash, reflecting a premium of 30% of Splunk’s closing stock price on August 30, 2023 of $120.28.
Following this conversation, the Transaction Committee convened another meeting on August 30, 2023. Members of Splunk’s management team (including Mr. Steele) and representatives of Skadden, Qatalyst Partners and Morgan Stanley also attended the meeting. Representatives of Qatalyst Partners and Morgan Stanley together reviewed their preliminary financial analyses of Cisco’s latest proposal to acquire Splunk for $156 per share in cash based on publicly available information and the Updated Interim Management Projections and Sensitivity Cases. Following discussion, subject to the authorization of the Board of Directors, the Transaction Committee authorized and instructed Mr. Steele to finalize negotiations with Cisco at the highest price Mr. Steele could obtain from Cisco. Following this discussion, members of Splunk’s management team (including Mr. Steele) departed the meeting so the Transaction Committee could meet in executive session with Splunk’s outside financial and legal advisors.
On August 31, 2023, Mr. Steele called Mr. Robbins and Mr. Robbins made a verbal offer for Cisco to acquire Splunk for $157 per share in cash, reflecting a premium of 29% to Splunk’s closing stock price of $121.26 on August 31, 2023, subject to Splunk’s acceptance of a customary exclusivity agreement.
Later that day, Splunk received a revised non-binding indication of interest from Cisco to acquire Splunk for $157 per share in cash and a copy of a proposed exclusivity agreement (the “Exclusivity Agreement”) providing Cisco with the exclusive right to negotiate with Splunk for a period of 30 days following execution of the Exclusivity Agreement.
On September 1, 2023, the Board of Directors convened a meeting to consider Cisco’s proposal to acquire Splunk for $157 per share in cash. Members of Splunk’s management team and representatives of Skadden, Qatalyst Partners and Morgan Stanley also attended the meeting. Mr. Steele updated the Board of Directors on the discussions with Cisco since the last meeting of the full Board of Directors, including the details of Cisco’s latest proposal to acquire Splunk for $157 per share in cash and Mr. Smith provided a summary of the work the Transaction Committee had completed in evaluating and overseeing the negotiation process, due diligence and other transaction-related matters. Representatives of Qatalyst Partners and Morgan Stanley together reviewed their preliminary financial analyses of Cisco’s proposal based on publicly available information and the Updated Interim Management Projections and Sensitivity Cases. A representative of Skadden then provided an overview of the directors’ fiduciary duties in connection with their evaluation of a potential sale of Splunk in general and Cisco’s interest in particular. In light of Cisco’s request for exclusive negotiations and the passage of time since the Board of Directors considered the issue in June 2023, the Board of Directors also revisited whether to conduct a market check prior to entering into the Exclusivity Agreement with Cisco in order to determine whether any other third parties might have interest in a strategic transaction with Splunk at this time. Members of the Transaction Committee confirmed that they had discussed the advisability of conducting a market check at various times during negotiations with Cisco and determined not to initiate a market check for the reasons discussed by the Board of Directors in June 2023. After considering the issues previously discussed by the Board of Directors in June 2023, the transaction price being proposed by Cisco and the state of Splunk’s business and financial outlook, the Board of Directors determined that a market check was unlikely to yield additional interest in a transaction with Splunk at this time. Following discussion of the foregoing matters, the Board of Directors authorized and instructed Splunk to commence negotiation of definitive transaction agreements and documentation with Cisco at a transaction price of $157 per share in cash and to enter into an exclusivity agreement with Cisco to enable the parties to negotiate such definitive agreements and to enable Cisco to complete its confirmatory due diligence review of Splunk. Following this discussion, members of Splunk’s management team (including Mr. Steele) departed the meeting so the Board of Directors could meet in executive session with Splunk’s outside financial and legal advisors.
On September 2, 2023, Splunk and Cisco entered into the Exclusivity Agreement and commenced confirmatory due diligence and negotiation of definitive agreements for the proposed transaction.
On September 5, 2023, Mr. Robbins shared Cisco’s desired targeted announcement date of September 21, 2023 and preliminary expectations for the communications roll-out following the public announcement of a the proposed transaction.
Over the course of the ensuing period of time until the parties entered into the merger agreement on September 20, 2023, Cisco and its advisors continued their confirmatory due diligence review of Splunk and representatives of Splunk, Cisco, Skadden and Simpson negotiated the terms of the merger agreement and other definitive documentation for the proposed transaction.
On September 7, 2023, a representative of Simpson called a representative of Skadden seeking permission for Cisco to commence discussions with Mr. Steele and potentially other key senior executives of Splunk regarding their respective roles with Cisco following the completion of the proposed transaction. The representative of Simpson conveyed Cisco’s view that Mr. Steele and potentially other key senior executives were critical to Cisco’s willingness to proceed with the proposed transaction, so Cisco was conditioning its willingness to enter a definitive transaction agreement with Splunk on the completion of an employment agreement with Mr. Steele and potentially other key executives to be determined after further discussion (all of which would only become effective upon the completion of the proposed transaction). Mr. Steele and the Transaction Committee discussed this request and determined to authorize Cisco to discuss Mr. Steele’s role at Cisco but not his compensation at this time, and Mr. Steele agreed to abide by the parameters of this conditional authorization until the Transaction Committee authorized compensation related discussions. The Transaction Committee also authorized and instructed Mr. Steele to provide oversight of Cisco’s engagement with other key senior executives of Splunk to ensure such engagement did not affect, interfere with or disrupt ongoing negotiations with Cisco regarding the transaction in general. A representative of Skadden conveyed the Transaction Committee’s conditional authorization to Simpson. Thereafter, Mr. Steele had numerous discussions with Cisco regarding his role at Cisco following the completion of the proposed transaction but compensation matters were not discussed. During this period of time, Mr. Steele also discussed with representatives of Cisco the potential role various other senior Splunk executives may have with following the completion of the transaction. Following those discussions, it was agreed that Cisco would only seek to negotiate and finalize employment agreements with two other senior Splunk executives as a condition to entering into a definitive transaction agreement with Splunk.
On September 10, 2023, a representative of Simpson sent a draft of a voting agreement to representatives of Skadden, pursuant to which H&F would be required, among other things, to vote their shares of Common Stock in favor of adoption of the merger agreement and the merger, and against any competing transaction, so long as the merger agreement remained in effect. Over the course of the ensuing period of time until the parties entered into the merger agreement on September 20, 2023, representatives of Kirkland & Ellis LLP, outside counsel to H&F, Simpson and Skadden negotiated and finalized the terms of the voting agreement.
On September 13, 2023, the Board of Directors and the standing committees thereof held previously scheduled meetings. During these meetings, the Board of Directors and the Talent and Compensation Committee thereof discussed the status of negotiations with Cisco and its advisors and provided guidance and instruction on various transaction related issues under negotiation with Cisco, including the terms of a potential employee retention scheme.
Following this meeting of the Board of Directors, Splunk’s management team and Skadden negotiated the final terms of the definitive agreement for the proposed transaction with Cisco and Simpson. The Transaction Committee provided guidance and instruction to management and Skadden throughout these negotiations, meeting on September 17, 18 and 19, 2023 to discuss the status and terms of such negotiations.
In addition, following the September 13 meeting of the Board of Directors, Cisco also began discussions and negotiations with Mr. Steele, Mr. Casey and Christian Smith, Splunk’s Senior Vice President and Chief Revenue Officer, regarding their employment with Cisco. On or around September 14, 2023, Cisco requested permission to propose and negotiate full terms of the senior executives’ employment agreements, including compensation-related items. After discussion and consideration of the progress of Splunk’s negotiations on the overall transaction with Cisco, the Transaction Committee authorized Mr. Steele, Mr. Casey and Mr. Smith to negotiate their employment with Cisco, including compensation-related items. Thereafter, all three executives and their personal legal counsel negotiated the terms of their respective employment agreements with Cisco and Simpson.
On September 20, 2023, the Board of Directors convened a meeting to discuss the fully negotiated terms of the definitive agreement for the proposed transaction with Cisco. Members of Splunk’s management team and representatives of Skadden, Qatalyst Partners and Morgan Stanley also attended the meeting. Representatives of Qatalyst Partners reviewed with the Board of Directors its financial analyses of the merger consideration of $157 per share of Splunk common stock. Subsequently, a representative of Morgan Stanley presented Morgan Stanley’s financial analyses of the proposed transaction. A representative of Skadden then presented a detailed outline of the fully negotiated definitive merger agreement and related documentation for the proposed transaction. The Board of Directors was then presented with a summary of the terms of the proposed employment arrangements with Mr. Steele, Mr. Casey and Mr. Smith. After discussion among the Board of Directors and representatives of Qatalyst Partners, Morgan Stanley and Skadden, (1) a representative of Qatalyst Partners delivered Qatalyst Partners’ oral opinion, subsequently confirmed in writing, dated September 20, 2023, to the Board of Directors that, as of such date and based upon and subject to the various limitations, qualifications and conditions set forth in the Qatalyst Partners’ written opinion, the Per Share Merger Consideration to be received pursuant to, and in accordance with, the terms of the Merger Agreement by Splunk Stockholders (other than Parent or any affiliate of Parent) was fair, from a financial point of view, to such Splunk Stockholders (for more information, see the section of this proxy statement captioned “The Merger—Opinions of Qatalyst Partners LP and Morgan Stanley & Co. LLC”), and (2) a representative of Morgan Stanley delivered Morgan Stanley’s oral opinion to the Board of Directors, subsequently confirmed in writing, that, as of September 20, 2023, and based upon and subject to the various limitations, qualifications, assumptions and other matters set forth in the written opinion, the Per Share Merger Consideration to be received pursuant to the Merger Agreement by Splunk Stockholders (other than the holders of the Excluded Shares) was fair, from a financial point of view, to such Splunk Stockholders (for more information, see the section of this proxy statement captioned “The Merger—Opinions of Qatalyst Partners LP and Morgan Stanley & Co. LLC”). After additional discussions of the proposed transaction and the financial analyses and opinions and the terms of the transaction documentation summarized for the Board of Directors at the meeting, the Board of Directors, among other related matters, unanimously (1) determined that it was in the best interests of Splunk and Splunk Stockholders, and declared it advisable, to enter into the Merger Agreement and consummate the Merger upon the terms and subject to the conditions set forth therein; (2) approved the Merger Agreement, the Merger, the other transactions contemplated by the Merger Agreement, the execution and delivery of the Merger Agreement by Splunk, the performance by Splunk of its covenants and other obligations thereunder, and the consummation of the Merger upon the terms and conditions set forth therein; and (3) resolved to recommend that Splunk Stockholders adopt the Merger Agreement in accordance with the DGCL.
Later in the day on September 20, 2023, Cisco and Splunk executed and delivered the Merger Agreement and Cisco, Splunk and H&F executed and delivered the Voting and Support Agreement.
Early in the morning on September 21, 2023, the parties issued a press release publicly announcing the proposed transaction.