Under Chief Executive Officer Chuck Robbins, Cisco has been trying to lessen its dependence on one-time sales of expensive hardware and shift toward software and services. Splunk is its most expensive push yet into that area and will help Cisco reach a broader base of customers, who can use the new services to gain insight into their network and computing operations.

The deal should be cash-flow positive in the first year after closing and add $4 billion in annual recurring revenue, Cisco Chief Financial Officer Scott Herren said on a conference call with analysts Thursday. The companies expect the acquisition to be completed by the end of the third quarter next year.

Splunk, based in San Francisco, is known for data observability services, which allow companies to monitor internal systems for network health, cybersecurity risks and other insights. It competes with companies like Datadog Inc. and Dynatrace Inc. The deal is a bet on information technology departments increasing their investment in data management services, driven in part by economywide excitement in artificial intelligence.

“The IT landscape is changing faster than we’ve ever seen — with hyper-connectivity, AI and increasing cyber threats, the value of data only increases, and that’s why this deal makes sense,” Robbins said on the conference call. “Together, we will tackle these challenges head on and help our customers become more resilient and secure.”

The cybersecurity industry is adapting to a new era of cloud computing and AI, which together are increasing the pace and scale of threats. While Cisco already has ways for customers to see what’s going on inside their networks,

Splunk will take those products even further, the companies’ executives said. Users will get alerts on unusual activity in their systems, as well as receiving far more details and the ability to immediately respond.

Still, the deal wasn’t warmly received by Cisco investors, who sent the shares down 3.9% as of 11:26 p.m. in New York. Some thought the acquisition was too expensive. “It’s a good move from a strategic perspective, but there’s not enough value in the move to overcome the excessively high price,” said David Trainer, head of market research firm New Constructs.

The acquisition price values Splunk significantly higher than the average software peer based on 2024 revenue estimates, according to William Blair analyst Jonathan Ho.

The valuation reflects a recent effort to run a tighter ship. Splunk has been focused on improving profitability under the leadership of CEO Gary Steele, who joined the company last year. “We have been seeing Splunk transform from a growth-at-all-costs company to one that has cleaned up costs and improved margins under the new management,” said Bernstein analyst Mark Moerdler.

The two companies had held talks in the past, but discussions fell apart last year, Bloomberg reported. Woo Jin Ho, an analyst at Bloomberg Intelligence, described the acquisition as “the Moby Dick” of deals that’s been talked about for quite some time. It could help Cisco find the recurring, subscription-based software revenue it has been seeking, Ho added.

The Splunk acquisition is far bigger than Cisco’s takeover of Scientific Atlanta for about $7 billion in 2006. “We haven’t done a big deal because we had never gained conviction on a big deal,” Robbins said. “And I can tell you that the work that Gary has done at Splunk in the last 18 months is exceptional.”

While regulators have been more keen to challenge big mergers, Robbins said he believes the transaction will close within nine to 12 months. Herren added that the deal doesn’t need regulatory approval in China — a stumbling block for Intel Corp.’s recent bid for Tower Semiconductor Ltd.

“There’s not any overlap in our portfolio, so we’re not consolidating any industries,” Robbins said. “We’ve had a lot of counsel that have looked at it.”