Light Reading

Investor to Juniper: 'You Suck'

Ray Le Maistre
1/14/2014
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Shaygan Kheradpir must wonder what he has let himself in for.

Only days after he settled into the CEO's chair at Juniper Networks Inc. (NYSE: JNPR), the vendor has found itself on the sharp end of a scathing appraisal of its shortcomings by significant investor Elliott Management, which has issued a detailed report into what it feels is wrong at the network equipment vendor and suggested how Juniper can put things right. (See Juniper Names New CEO.)

Hedge fund firm Elliott, which holds a 6.2% stake in Juniper, says Juniper has: an unnecessarily large cost base; an inefficient capital structure; a lousy mergers and acquisitions record; and a bloated portfolio, having failed to properly execute its moves into security and enterprise switching.

The activist investor believes Juniper has been ignoring calls for significant changes for years, and is now seeking meetings with the Juniper board and management team to discuss the actions it feels are necessary to improve Juniper's valuation.

In essence, Elliott wants Juniper to cut its annual operating costs by $200 million, instigate a $3.5 billion stock repurchasing scheme, and "streamline" its product portfolio to focus on service provider routing and exit some other areas, most notably security. The hedge fund believes such measures could send Juniper's share price to the $35-$40 range, significantly higher than its current price.

Elliott notes that its analysis shows that "Juniper’s assets are valuable and strategic and that the business possesses several fundamental upside drivers over the medium-term but that its future will be increasingly difficult if Juniper continues with its existing strategy."

News of the move, and the publication of Elliott's "Value Plan" (which you can see here in all its glory), gave hope to Juniper's other shareholders Monday, as the vendor's stock jumped nearly 7.6% to close the day at $25.32, its highest price since July 2011.

Juniper responded with the following statement late Monday:

    Juniper welcomes open communications with its shareholders and values their input.

    Juniper continues to deliver improved financial and operational performance as evidenced by five consecutive quarters of year-over-year revenue growth and our continued efforts to streamline the Company's cost base. We have a proven record of generating and returning cash to shareholders having returned approximately 105% of Juniper's free cash flow to shareholders in the last three years (fourth quarter of 2010 through third quarter of 2013) representing a total return of approximately $1.7 billion. Juniper continues to focus on returning capital to our shareholders. We believe Juniper has an innovative and robust product portfolio and is well positioned to deliver enhanced shareholder value and we are optimistic about the growth opportunities in the key markets we serve.

    The Elliott presentation was received this morning and we have not had any discussions with Elliott with respect to its content. The Company intends to review it carefully.

In its Value Plan, Elliott cited historical statements from financial analysts supporting its views. And indeed, MKM Partners analyst Mike Genovese issued a research note early Tuesday noting that MKM broadly agrees with the hedge fund's views, particularly with respect to cost-cutting and a greater focus on service provider routing, but feels the proposed size of the stock buyback might weaken Juniper's balance sheet, which in turn might make it less attractive to major network operators.

Overall, though, Genovese is in favor of Elliott's suggestions. Based on the expectation that Juniper's fourth-quarter 2013 results will be "upbeat" and that first quarter 2014 guidance will be favorable, plus the "likelihood that at least some of Elliott's suggestion will be implemented," Genovese has increased his target price on Juniper's stock from $26 to $30.

Juniper is set to report its financials on January 23.

Elliot is clearly in the mood to shake the networking sector in 2014, as it made an unsolicited bid to acquire application delivery controller (ADC) specialist Riverbed Technology Inc. (Nasdaq: RVBD) for nearly $3.1 billion on January 8. (See Riverbed Receives Takeover Bid .)

— Ray Le Maistre, Editor-in-Chief, Light Reading

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Ray@LR
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Ray@LR,
User Rank: Blogger
1/29/2014 | 6:12:47 AM
Re: long term no good
And that's part of the risk of being a listed company - investors can get on your back and put you undeer pressure in the public eye....

I's harder when the activist investor has a long list of evidence and a comms strategy that appeals to other investors that want a return ASAP -- I wonder how many JNPR investors have a long-term position? Or maybe that long-term doesn't look so hot....
cassis
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cassis,
User Rank: Light Beer
1/29/2014 | 5:17:59 AM
long term no good
Investors want ROI, yes, in short period of time. 

They wanna cut the opex and boost up the stock price for more money. Quick Money. 

It won't do anything good for J from a long-term perspective.....products, etc.  
David Dines
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David Dines,
User Rank: Blogger
1/14/2014 | 6:38:47 PM
Re: Software
Being a sailor I love the cliche about the wind blowing.  

It is curious about the timing of this, they hit the new guy before seeing what he is going to do.  I guess they did not think the old regime would act.

In theory Elliot's plan is rational, but I have observed that nearly every one of these get well plans are executed with a very broad brush and the cuts will be to the bone. As someone once said, you can't shrink yourself to greatness. 

 
TomNolle
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TomNolle,
User Rank: Light Sabre
1/14/2014 | 3:42:17 PM
Re: Software
I don't know whether getting some key Microsoft execs in makes you a software company or even proves you have a commitment to be one.  It takes more to be a clown than a paint job and a funny nose.
brookseven
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brookseven,
User Rank: Light Sabre
1/14/2014 | 2:15:01 PM
Re: Software
 

Ray,

 

Uh....that is the goal of investors.  Maximize their ROI.  One thing that happens is that Management Teams lose their focus on that goal.  That IS the job of management - Return the Maximum ROI to their shareholders.  They get caught up in maximizing their ROI on their job.

Now all the thoughts around strategy and execution are definitely debatable.  But BoDs and Executive Management are not always incented to provide maximum return to the owners.  

seven

 
Ray@LR
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Ray@LR,
User Rank: Blogger
1/14/2014 | 1:37:16 PM
Re: Software
SO, it's worth remembering that Elliott wants to make as much money from its investment as possible - that is its motivation. It has no other agenda. 

It's also clear, though, that it is not a lone voice. And it's hardly likely to have its views kicked back by other investors. 

Juniper needs to be smart.
sam masud
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sam masud,
User Rank: Light Sabre
1/14/2014 | 12:15:22 PM
Re: Software
Leaving aside everything else, Juniper is the place to work for software engineers: the average base salary for software engineers at Juniper is about $160K, compared with about $110K at Brocade or Cisco. Go figure...
DOShea
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DOShea,
User Rank: Blogger
1/14/2014 | 10:49:24 AM
Software
If you look back at the headlines of a few years ago, you would think Juniper was ahead of the game in trying to become more of a software-focused company and importing several Microsoft people. I guess it shows in part that determining which way the wind is blowing doesn't make you a great sailor, or you know, insert your own cliche here...
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