Splunk Jumps on $1 Billion Investment

Shares of unstructured data analytics specialist Splunk (NASDAQ: SPLK) jumped on Tuesday following news that the company had received a hefty $1 billion investment from Silver Lake. Investors cheered the vote of confidence, as Splunk plans to use the money to fund various growth initiatives while continuing its ongoing pivot to the cloud.

As of 12 p.m. EDT, the stock was up 11%. 

A familiar deal structure

The investment comes in the form of convertible senior notes, which is a popular way for large institutional investors to provide funding while enjoying some downside protection. The paper will mature in July 2026 and have an initial conversion price of $160, representing a 30% premium to the volume-weighted average closing price over the past ten trading days. The notes will carry an interest rate of 0.75%.

“We’ve significantly evolved our business since we began our transformation to become a cloud-first company over two years ago, and today’s announcement reaffirms the strength of our business fundamentals, cloud strategy and high-growth trajectory,” Splunk CEO Doug Merritt said in a statement. “Silver Lake has a strong reputation and track record of investing in innovative technology companies, and with their support, we are accelerating toward our goals as we deliver the most scalable and powerful data platform in the cloud.”

As part of the deal, Splunk has authorized a $1 billion share repurchase program, which will help the company manage its capital structure and offset some of the potential dilution associated with the convertible notes. The investment is similar to another investment Silver Lake made last year with Twitter (NYSE: TWTR), which also consisted of convertibles and a buyback program.

Silver Lake has also secured a seat on Splunk’s board of directors. Silver Lake Chairman Ken Hao will be joining the board, which will now consist of 11 directors (including 10 who are independent).

Splunk recently reported an 83% jump in cloud annual recurring revenue (ARR), which now stands at $877 million. The company now has 203 customers that contribute over $1 million in cloud ARR. Splunk finished last quarter with $1.8 billion in cash.

Why Splunk stock didn’t fall

Sometimes when companies announce offerings for convertible notes, the stock drops since  hedge funds that utilize convertible arbitrage strategies often purchase the bonds. That strategy entails simultaneously buying the notes while short-selling the stock, which creates temporary selling pressure as the hedge funds establish their positions.

However, this deal is not an offering being made available to other funds. Rather, it’s a direct investment from Silver Lake, which does not use convertible arbitrage. Silver Lake is one of the largest private equity firms in the world, specializing in technology and working to create value at its portfolio companies.

Silver Lake has an established track record of success. Let’s see if it can do the same with Splunk.

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