AD Newsletter: April 2024
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Get Up to Speed: Cisco Systems Acquisition of Splunk
By AD Alumni Fellow, Siya Sharma
In the AI age where data rules all, Cisco Systems is going for the crown. The networking titan just closed its largest acquisition ever - a massive $28 billion all-cash takeover of data analytics powerhouse Splunk at $157 per share.
For Cisco, best known for selling telecom and IT hardware, the monster deal represents a bold double-down on software and the recurring revenue streams crucial for AI dominance and sustainable growth. By absorbing Splunk's leading big data platform for machine data analytics, Cisco gains unprecedented capabilities to harness AI insights across the enterprise, adding about $4 billion in annualized recurring revenue to Cisco's books, putting their total ARR around $30 billion.
At the core of the deal is leveraging AI to provide predictive cybersecurity intelligence. By correlating data from disparate vendor systems through Splunk, customers can take a more proactive stance against threats. Generative AI will also democratize Splunk's powerful but complex tools. "With our AI assistants, you can use English to automatically generate proprietary commands and get outcomes without advanced training," said former Splunk CEO Gary Steele, now an executive VP at Cisco.
Beyond security, the AI-enabled software simplifications will span Cisco's portfolio. Cisco CEO Chuck Robbins cited using natural language to streamline cumbersome configuration screens for security policies as a key generative AI use case.
Originally expected to close by late 2024, the deal wrapped up in merely six months as regulators rapidly signed off. The accelerated timing underscores the urgency for Cisco to seize AI supremacy amid soaring enterprise demand.
With unmatched data scale from years of machine learning, the combined Cisco-Splunk juggernaut is arming itself with the assets to reign over AI for enterprises. As bits become the new currency, Cisco is going all in to mint the future.
AD Fellow Spotlight
Meet: Anthony (Trác) Do
AD 2023-2024 Cohort
University of Tennessee, Knoxville
Incoming Summer Analyst, Lazard
Anthony Do is a first-generation Vietnamese American college student at the University of Tennessee, Knoxville (UTK), pursuing a major in Finance and the Heath Integrated Business & Engineering Program. Driven by a passion for community building, philanthropy, and innovation, Anthony aims to break barriers and set new standards for himself and future generations. His diverse background equips him with the ability to bridge gaps and effectively communicate complex ideas across diverse audiences.
Raised in an immigrant household, Anthony learned the values of grit, empathy, and adaptability, which continue to shape his inclusive approach to life. As the first in his family to attend college, Anthony is determined to break the cycle of low-income living and provide a better future for his loved ones. Inspired by the sacrifices of his parents and the opportunities education affords, Anthony approaches every endeavor with determination and dedication. Seeking mentorship from upperclassmen upon entering college, Anthony quickly learned to navigate unfamiliar terrain and accelerate his personal and academic growth.
Anthony Do's caregiving experience for his grandmother during her battle with dementia was a pivotal chapter in his life, profoundly shaping his perspective and instilling in him a deep sense of empathy and responsibility. As her primary caretaker, he navigated the complexities of balancing familial responsibilities with academic pursuits.
Motivated by these life experiences, Anthony envisions a future where his efforts contribute to positive change and societal improvement. With a keen interest in finance and a knack for quantitative thinking, Anthony aspires to pursue a career in investment banking, drawn by its potential for impactful projects and social advancement. Through his work in finance, Anthony aims to actively contribute to projects that shape the world for the better, echoing the transformative impact of investment banking on society.
Anthony will be spending this summer interning at Grey Rock Investment Partners in Dallas, Texas, gaining valuable experience in the Private Equity space. In his junior summer, he plans to intern at Lazard in Investment Banking, furthering his knowledge and skills in the industry.
What are you most proud of and why?
I am most proud of myself for making the most out of the cards that I was dealt in life. On top of this I worked hard to build more bridges and open doors to opportunities that usually aren't accessible for people like me. My hard work is starting to pay off as I secured an Investment Banking offer which has been surreal to wrap my head around. I know that I will be able to provide for my family by breaking the mold and trailblazing a new way for myself and future generations. Now I seek to pay it forward to help those who are pursuing a similar path.
Why did you join AD?
I heard about AD from Alumni: James Rhee and Rahel Sitotaw. They were some of my friends I knew from HeadStart Fellowship so I reached out to them and they spoke very highly about their AD experiences. I am a firm believer that you become the average of the 5 people around you. AD would provide a community of like-minded people who all work extremely hard and are genuinely great people.
What were your biggest concerns about breaking into finance? How did AD address those concerns?
I did not have the resources or connections to break into finance. AD had the exact solution to address my concerns. At my university, there were no finance classes until junior year and they weren't curated for banking. Being First-Gen and low-income my parents worked super hard to enable me an opportunity at education and I did not take it for granted and worked super hard. AD has taught me so much about finance such as business mechanics, accounting, valuation, M&A, and LBOs. I had to go the extra mile to get ready for recruiting and AD helped me with that. AD also has a mentor system and a great alumni database who are more than willing to help. Getting the initial call at a firm is hard but leveraging these connections made it easier.
What advice would you give aspiring finance professionals?
Work hard early on, you will not regret working hard because it sets the foundation for you. It opens doors for you later in your life. Be extremely curious and resourceful, try to learn as much as you can, in this day in age everything is found online. It’s all at our fingertips it's a matter of ambition.
Definition of the Month: LBOs: How Private Equity Firms Utilize Leverage Strategically
Written by AD Alumni Fellow Aidan Burrell
Imagine you want to purchase a house but do not have enough cash to buy it outright. In this case, most people would buy the home using a mortgage. Instead of paying the total price upfront, you can use a mix of your own money and funds borrowed from a bank. A “leveraged buyout” is private equity’s version of a mortgage used to acquire companies instead of a house.
Private equity firms are known for their strategic utilization of leveraged buyouts (LBOs), a financial engineering strategy that has become synonymous with many firms’ investment approach. At a high level, an LBO involves acquiring a company using a significant amount of debt, typically secured by the acquired company's assets, along with a smaller portion of equity contributed by the PE firm and sometimes other investors.
Like in the mortgaged-house example, the borrowed money amplifies the buyer's purchasing power, allowing them to execute a transaction that they likely could not afford otherwise.
How It Works
Firstly, the PE firm identifies a target company with strong growth potential, attractive cash flows, and (ideally) undervalued assets. The target company is typically either a publicly traded company looking to go private or a privately held firm seeking growth capital or restructuring.
Once the target is identified and negotiations conclude, the PE firm purchases the business using a mix of debt and equity. The debt component is crucial in an LBO, as it allows the PE firm to amplify its returns. As the acquired company generates cash flows, a portion is used to pay down the debt, reducing the overall leverage. This allows the PE firm to delever the business without using any internal funds. Ultimately, the PE firm can achieve a higher return on investment (ROI) at exit than if it relied solely on equity financing.
Why It's Effective & Valuable
There are several reasons why PE firms favor LBOs as a key strategy:
Enhanced Returns: Leveraging debt allows PE firms to amplify their returns on investment. By putting up only a fraction of the total acquisition cost in equity and financing the rest with debt, PE firms can generally achieve a higher ROI than all-equity investments.
Operational Control: In many cases, PE firms acquire a controlling stake in the target company through an LBO. This gives them the authority to implement strategic changes and operational improvements without the constraints of public market scrutiny.
Value Creation: Through active management and strategic initiatives, PE firms can unlock value in the target company that may have been overlooked or underutilized by previous owners. This potential for value creation is a key driver of returns in LBO transactions.
Alignment of Interests: PE firms often encourage the existing management team to “roll over” a portion of their equity ownership. This aligns the management's interests with those of the PE firm while keeping the knowledgeable management team on board, as both parties have a vested interest in maximizing the company's value.
Flexibility: LBOs offer flexibility in structuring the deal and financing arrangements. PE firms can tailor the debt-to-equity ratio to optimize returns and manage risk effectively.
Potential Risks
Although leveraged buyouts can be a highly profitable strategy, it is subject to a variety of risks.
High Levels of Debt: LBOs typically involve financing a large portion of the acquisition price with debt. This leverage can significantly increase financial risk, especially if the acquired company's cash flow or assets underperform or if interest rates rise, as this increases the cost to service debt more expensive.
Interest Rate Risk: In line with the risks of high leverage, LBOs are sensitive to changes in interest rates since the cost of servicing debt can increase if interest rates rise. This can put pressure on cash flows and profitability, potentially leading to financial distress if the company fails to meet its debt obligations.
Liquidity Risk: LBOs can reduce the liquidity of the acquired company, as cash flows will likely be used to service debt. This lack of liquidity can limit the company's ability to fund growth initiatives, make necessary investments, or weather unforeseen financial challenges.
This list is not exhaustive. Other risks include failure to implement growth strategies successfully (i.e. execution risk), market risk, covenant risk, and exit risk.
Conclusion
In conclusion, leveraged buyouts are essential to private equity investing, allowing firms to unlock value and enhance returns in portfolio companies. While LBOs carry inherent risks associated with leverage, they can be a powerful tool for generating high returns backed by a thoughtful investment thesis and executed effectively.
UPCOMING EVENTS
Financeable: Valuation - April 3 @ 7 PM ET
RSVP Here
Learn the fundamentals of valuation with AD Co-Founder and founder of Financeable, Mike Kimpel.
AD Info Session & Alumni Panel - April 9 @ 7:30 PM ET
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Want to learn more about the Access Distributed Sophomore Fellowship? During our live event, you will hear from AD Fellow Alumni and learn about their experience in the fellowship program, how they landed their incredible internships, and more!
Financeable: Build a Financial Model in 2 Hours - April 17 @ 7 PM ET
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No experience required!
Design Your Career - May 16 @ 7 PM ET
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Are you ready to embark on a journey to design your dream career? DYC is back, and this time, it's bigger and better than ever!
