Private equity firm Hellman & Friedman Inc. has acquired a 7.5% stake in Splunk Inc.

Hellman & Friedman confirmed the investment in a regulatory filing. The Wall Street Journal reported the move today.

San Francisco-based Splunk provides a widely used data analytics platform of the same name. Companies use the platform to find and troubleshoot technical issues in their information technology environments. Splunk’s software is also useful for other tasks, most notably detecting cybersecurity incidents.

The 7.5% stake that Hellman & Friedman has acquired in Splunk reportedly makes it the company’s largest active shareholder. The stake is estimated to be worth about $1.4 billion. Another private equity firm, Silver Lake, invested $1 billion in Splunk last June through a purchase of convertible senior notes.

“Private equity firms invest into companies when they see them undervalued and consider it a real chance to turn the company around,” Constellation Research Inc. analyst Holger Mueller told SiliconANGLE. “H&F must be thinking that Splunk is undervalued, and with a new CEO on board who sold his previous company to private equity as well, might find a PE-friendly management team.”

Hellman & Friedman is said to have begun buying Splunk shares in mid-December, shortly after the software maker announced the departure of longtime Chief Executive Officer Doug Merritt. Splunk experienced significant business growth under Merritt’s leadership. The company’s annual revenue increased from about $300 million in 2014, the year before the executive took the helm, to $2.67 billion in fiscal 2021. 

Along the way, Splunk established itself as one of the top providers of software for detecting and troubleshooting IT malfunctions. The company also launched a major effort to refocus from selling software licenses to cloud subscriptions. 

Splunk announced earlier this week that it has appointed longtime technology executive Gary Steele to succeed Merritt as CEO. Steele is joining the company from Proofpoint Inc., an email security provider that was acquired by private equity firm Thoma Bravo for $12.3 billion last year. 

Hellman & Friedman is “supportive of Mr. Steele and plans to work with the company,” the Journal reported today. Shareholders responded positively to the private equity firm’s investment: Splunk’s share price jumped more than 7% at one point today and is currently up more than 5%.

Word of Hellman & Friedman’s investment has emerged a few weeks after it was reported that Cisco Systems Inc. had sought to acquire Splunk. Cisco reportedly made a takeover offer of more than $20 billion for Splunk at one point. However, the Journal reported last month that the companies “aren’t currently in active talks,” while Bloomberg characterized the talks as having broken down.

Splunk had a market capitalization of about $18 billion when reports emerged of Cisco’s $20 billion-plus acquisition offer. Today, Splunk is worth about $20.3 billion, thanks partly to the stock price jump that followed the news of Hellman & Friedman’s investment.

The company experienced a few disappointing quarters recently, but its latest quarterly results topped expectations. In the three months through Jan. 31, the company’s revenues climbed 21% year-over-year, to $901.1 million, well above the $774.1 million analysts had anticipated. The company’s loss and firs-quarter guidance exceeded expectations as well.

That Steele is coming aboard after leading Proofpoint, a major cybersecurity company, suggests cybersecurity will likely remain a core focus of Splunk’s revenue growth efforts. Splunk sells a specialized edition of its data analytics platform optimized for breach detection and remediation. Gartner Inc. estimates that, as of 2020, Splunk was the largest player in the security information and event management market with a 29% market share.

“The core question for Splunk remains, though: Can it successfully convert to subscription pricing and manage reasonable profit?” said Mueller. “That matters not only to investors, but also for customers, who want and need a vendor with a strong balance sheet.”

Hellman & Friedman’s purchase of a 7.5% stake in Splunk is one of several high-profile investments that the firm has made in the software market. The firm is a major stakeholder in Genesys Cloud Services Inc., a provider of customer experience management software that received a $21 billion valuation last December.

In 2020, the firm merged Ultimate Software, in which it invested in 2019, with Kronos Inc., in which it made an investment in 2007, to create Ultimate Kronos Group, a provider of human capital management and resources services.

Hellman & Friedman also backed DoubleClick Inc., an advertising technology company that was acquired by Google LLC in 2008 and became a core component of the search giant’s ad business.

With reporting from Robert Hof

Image: Splunk