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Would Juniper Go to Extremes?

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News Analysis
Light Reading
2/17/2004
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Is it possible that Juniper Networks Inc. (Nasdaq: JNPR) is not done with its acquisitions? What if last Monday's $4 billion bid for NetScreen Technologies Inc. (Nasdaq: NSCN) were part of something bigger?

It's very possible, some sources say. Juniper may be readying a full assault on Cisco Systems Inc. (Nasdaq: CSCO), possibly by buying an enterprise switching vendor such as Extreme Networks Inc. (Nasdaq: EXTR) or Foundry Networks Inc. (Nasdaq: FDRY). Sources say Extreme is the more likely candidate.

"Juniper has been looking" at Extreme, says one analyst who requested anonymity. "They could do something at a later stage or extend a partnership in the near term."

Juniper on Monday announced a $4 billion bid for NetScreen Technologies, aligning itself for a run at the enterprise business and at Cisco, which has the leading market share in firewall products, according to IDC. (See Juniper Buys NetScreen and Security Appliance Market Grows 22%.)

Extreme and Foundry officials have declined to comment. Juniper vice president of marketing Christine Heckart likewise won't confirm or deny any merger talks, suggesting that Juniper wants some time to deal with the NetScreen buy. "Can we digest the bite we just took before we take some more?" she asks.

But analysts say Juniper management may be considering a roll-up of sizeable enterprise players. Juniper's $1 billion shelf offering filed in November would go untapped by the all-stock NetScreen deal, leaving Juniper with the opportunity to raise more resources and keep its shopping spree alive. "We believe Juniper is not done shopping," says Mark Sue, an analyst with CE Unterberg Towbin. (See Juniper Buys NetScreen and Juniper 'On the Prowl'.)

Given Extreme's nearly $1 billion valuation, a takeover would be gutsy and expensive (maybe even, uh, a little extreme), but it's got a tempting tactical ring to it.

Juniper has very little share of the enterprise market, because its routers have been geared toward higher-end telecom networks. The vendor is correcting that with its M7i and M10i, which target the Cisco 7200 and 7500 and could fit nicely in the enterprise, says Neil Osipuk, analyst with Infonetics Research Inc. (see Juniper Touts New Edge Lineup).

With NetScreen, Juniper might have a way to get its other routers into the enterprise. "The best-case scenario is that NetScreen's enterprise customers provide additional opportunities for Juniper routers and that Juniper's customers provide additional opportunities for NetScreen security gear," writes analyst Timm Bechter of Legg Mason Inc. in a research note.

If Juniper wants even more of the enterprise, Extreme could be the next step. "Juniper may continue its push into the enterprise. A Layer 3 switch company may round out its enterprise perspective," says the man named Sue.

And an acquisition would help Juniper get a fast foothold as competition gears up. The ongoing resurgence in enterprise router sales is attracting new players such as the joint venture between 3Com Corp. (Nasdaq: COMS) and Huawei Technologies Co. Ltd., notes Infonetics' Osipuk.

But Extreme, with its fat market cap, would be too much to swallow alongside NetScreen, some say. "I don't think it would be well received," scoffs Stephen Koffler, analyst with Wachovia Securities Inc. "Extreme hasn't been a very strong execution story."

Consider why analysts liked the NetScreen deal. Nikos Theodosopoulos of UBS Investment Research says NetScreen reflects Juniper's four brightest facets: high gross margins, high operating margins, technology leadership, and a track record of competing successfully against Cisco. "Anything else [Juniper does] to expand in either the service provider market or the enterprise market needs to hit those characteristics," Theodosopoulos says.

Extrapolating that analysis to Extreme, the prospects don't look as promising. On the competition and technology fronts, Extreme hasn't managed to face down Cisco the way Juniper and NetScreen have. Nor are its margins up to Juniper standards:

Table 1: Juniper Loves Margins

Gross margin Operating margin
Juniper
65.9%
19.4%
NetScreen
79.0%
24.6%
Extreme
48.5%
-6.7%
For the Dec. 2003 quarter
Source: Pacific Growth Equities


If Extreme won't work, what other path could Juniper take? Force10 Networks Inc. is a name that's been making the rounds, as the private company would be a cheaper way to tap the enterprise.

Juniper has options outside the enterprise, too. CE Unterberg's Sue likes the possibility of Juniper shopping "maybe in the optical transport segment, particularly because of the value metrics. The prices are pretty cheap relative to some of the other companies out there."

Edge networking is a possibility, too. While Juniper claims its routers are well equipped for the multiservice edge, many think the company needs new products for packing ATM or Frame Relay traffic into IP/MPLS form. That's led to rumors of a multiservice router being under development (see Has Juniper Gotta Sinatra? ).

Then there are those who say Juniper should stand pat, taking time to digest NetScreen. Juniper seems more interested in carrier markets than the enterprise, writes Prudential Securities analyst Inder Singh in his research, and he thinks the company should concentrate on merging its routers with NetScreen security to target new carrier contracts.

Juniper remains mum on its acquisition plans, but Heckart says the company no longer differentiates enterprise networks from carrier networks anyway, echoing the sentiments of CEO Scott Kriens in a recent earnings call. Rather, Juniper's sights are set on the "Infranet" initiative announced in October, which looks to hybridize the Internet with the reliability of enterprise networks (see Juniper Does Vision Thing).

Juniper's Heckart won't say whether Juniper needs acquisitions to fulfill that mission, offering only that Juniper has a three-pronged way of looking at which business problems to tackle next. "We will look for things that are at that intersection of being a hard problem to solve, having a high strategic value [for the customer], and having a high rate of [technological] change," she says.— Craig Matsumoto, Senior Editor, Light Reading

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tsat
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tsat,
User Rank: Light Beer
12/5/2012 | 2:26:06 AM
re: Would Juniper Go to Extremes?
Juniper learned it's lesson with the failed
Pacific Broadband purchase... I doubt you will
see Juniper purchase a company that does not
add immediate, substantial and growing revenue
to the bottom line.

-tsat
wilecoyote
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wilecoyote,
User Rank: Light Beer
12/5/2012 | 2:26:06 AM
re: Would Juniper Go to Extremes?
Is not to buy Extreme, where their market share numbers are dropping like a stone and the VARs and channel partners are fleeing. They should just OEM them if anything. Juniper likes winners and Extreme doesn't qualify.

Juniper's play is to pick up Foundry, which is on the rise, as a merger of equals (the only way BJ considers it--BJ becomes COO and Vice Chair?), or buy Force10, which has the most compelling high end switch on the market and is probably a lot cheaper than the $1.5B price tag Extreme would command. Juniper made its name selling high end gear, and leveraging it downsteam. Force10 gets them there, and it also plays in service provider networks with its QOS and high availability story.

Juniper needs to get Netscreen out of the hardware business, fast, and get their software ported to someone's blades as fast as they can, or they'll drown in commodity hardware and lose out on the 10gigE upgrade cycle that's happening right now.

They also need a WLAN play if they are going to get a foothold in the LAN, where Cisco is suddenly vulnerable.
Kevin Mitchell
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Kevin Mitchell,
User Rank: Light Beer
12/5/2012 | 2:26:04 AM
re: Would Juniper Go to Extremes?
The PB aquistion and push into cable was a tad different than Juniper's current endeavors. Cable is an insular world and many companies have trouble breaking into that part of the world that touches the HFC network. They can sell routers to MSOs, but even better now that they don't compete with their CMTS friends.

Juniper knows routing and will know security via Netscreen. That's a beatiful combo to take on Cisco in the enterprise. Now they will have a channel (Netscreen's current distributors) and can also sell an alternative to a Catalyst switch if they pick up an established switch player (with CHANNELS!).

It will be hard work building an enterprise brand, but the SPs trust them already for their infrastructure and that's a channel as well.

Also, Juniper has been bashing Cisco in the WSJ for over a year. There are lots of enterprise executives reading that and hearing the Juniper name.

"It is hard enough to remember my opinions, without also remembering my reasons for them!"
-Nietzsche

---------
Juniper learned it's lesson with the failed
Pacific Broadband purchase... I doubt you will
see Juniper purchase a company that does not
add immediate, substantial and growing revenue
to the bottom line.

-tsat
Mezo
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Mezo,
User Rank: Light Beer
12/5/2012 | 2:25:59 AM
re: Would Juniper Go to Extremes?
This is by far the dumbest quote I've read in an LR article:

If Juniper wants even more of the enterprise, Extreme could be the next step. "Juniper may continue its push into the enterprise. A Layer 3 switch company may round out its enterprise perspective," says the man named Sue.

Not including BobbyMax of course...

Belzebutt
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Belzebutt,
User Rank: Light Beer
12/5/2012 | 2:25:57 AM
re: Would Juniper Go to Extremes?
Remember when everyone thought the T640 would be called the M320? Well, looks like the M320 lives again:
http://www.juniper.net/product...
coreghost
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coreghost,
User Rank: Light Beer
12/5/2012 | 2:25:54 AM
re: Would Juniper Go to Extremes?
Cisco buying procket would give cisco nothing. Procket has no particular
compelling value. Its not a good MSE system, its not a good core
system. Procket got by for a long time on Tony's name, but
thats over now.

I suppose they could buy the engineers and embark on the HFR2 project,
but I dont know how cisco would merge one set of huge egos (HFR)
with another set (procket) and make them all happy.

I think Cisco is asleep. They are content with things
as they are and with buying their way out of any problem
they find themselves in.
cyber_techy
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cyber_techy,
User Rank: Light Beer
12/5/2012 | 2:25:54 AM
re: Would Juniper Go to Extremes?
One elephant buying another.
Indy_lite
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Indy_lite,
User Rank: Light Beer
12/5/2012 | 2:25:54 AM
re: Would Juniper Go to Extremes?
What is the possibility that Juniper's Netscreen Acq has awaken the giant Cisco ?

Would Cisco counter by taking over Procket ?
Cut_d_Crap
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Cut_d_Crap,
User Rank: Light Beer
12/5/2012 | 2:25:49 AM
re: Would Juniper Go to Extremes?
Juniper would do well to make a run for Extreme:

Instant access to multi-tiered distribution channels

'Enterprise' focused sales teams with actual custoemrs today

Familiarity with NetScreen sales people and products from on-going 'Purple' relationship

Full 'enterprise' coverage from low-cost wiring closet to high-capacity data center equipment (Summit thru BD10K)

Would Mr. Johnson "sell" his company - see my previous posts.

What would Force10 bring to the table?
capolite
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capolite,
User Rank: Light Beer
12/5/2012 | 2:25:47 AM
re: Would Juniper Go to Extremes?
Juniper doesn't need to buy a dog with fleas like Extreme. They can go recruit away the good engineers and sales people and pick up the pieces.
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