Cisco going after Splunk would be 'strategically positive,' MS says
raisbeckfoto/iStock Unreleased via Getty Images

A potential acquisition of Splunk (NASDAQ:SPLK) by Cisco (NASDAQ:CSCO) would be "strategically positive," even if Cisco has had a "mixed bag" with its acquisitions over the years, Morgan Stanley said.
Analyst Meta Marshall, who rates Cisco in-line with a $61 price target, noted that Cisco continuing to build out its software transformation could make sense, as it would "eventually derisk the model and help valuation."
"With dominant position in multiple on-premise markets, Cisco's valuation has been held back by more gradual moves toward the cloud and the revenue transition from opex vs. capex focused IT (trading ~15x FY23e P/E)," Marshall wrote in a note to clients. 
Marshall continued: "A challenge for Cisco in its transformation is the heft of the current $50 billion revenue base focused primarily on networking equipment, making it mathematically difficult to find the subscription revenues to transform the business (with or without strategic activity)."
Cisco shares were slightly lower in premarket trading on Monday, changing hands at $53.73, while Splunk gained nearly 8% to $123.35 on reports of the deal.
Marshall added that Splunk could give Cisco a boost in multiple areas, including cyber analytics, helping Cisco's security and analytics businesses, such as Extended Detection & Response. It could also help Cisco's AppDynamics business, thanks to Splunk's SiganlFX purchase.
However, the analyst also cautioned that Cisco's execution when it comes to deals has been a "mixed bag."
"While Meraki, Sourcefire, OpenDNS, Acacia have been well executed acquisitions, AppDynamics has stood out as a pure-play software acquisition that has not performed well (with AppDynamics revenue down Y/Y in some recent quarters)," Marshall explained.
"The ongoing business model transition and growing competition at Splunk could present additional challenges for Cisco if they pursued this acquisition," the analyst continued. "However, an ability to package Splunk's leading Security analytics and ITOM solutions with other security offerings, further optimize distribution and pricing, could present very interesting potential M&A synergies for Cisco."
Cisco was recently named one of 25 stocks by Wells Fargo to hedge against mutual fund's favorite stocks.