Optical/IP Networks

Juniper Nabs Unisphere for $740M

Juniper Networks finally got the deal done.

After shopping around for nearly a year for the appropriate edge router partner, Juniper Networks Inc. (Nasdaq: JNPR) announced today that it will buy Unisphere Networks Inc. from its parent company Siemens AG (NYSE: SI; Frankfurt: SIE) in a combination stock and cash deal valued at $740 million (see Juniper to Buy Unisphere).

As Light Reading reported previously, talks between the two companies became more serious earlier this month, when Unisphere was reportedly asking for $1 billion (see Juniper Scoping Out Unisphere?). Juniper announced this morning that it will pay $375 million in cash and 36.5 million shares of Juniper stock. At a closing price on Friday of $9.85, that gives the deal a total value of $740 million.

The deal was primarily driven by Juniper's need for a larger presence in the red-hot edge router market and Siemens's desire to divest its interest in Unisphere, a subsidiary it set up as a spinoff. Siemens executives had recently become impatient with their inability to take Unisphere public and were more aggressively shopping the company around, according to several sources close to the companies.

Juniper also markets an edge router, but it does not include the broadband aggregation functionality that comes with Unisphere's ERX series of routers.

Some of the most important points of the deal:

  • Juniper officials say that Unisphere's books showed $200 million in revenue in 2001. That puts the deal's value of $740 million at close to four times Unisphere's sales.
  • Unisphere CEO Jim Dolce will join Juniper as an executive vice president in charge of customer relations.
  • After the deal goes through, Siemens will own 9.7% percent of Juniper's stock and will be a Juniper reseller, making it a key partner going forward.

The most surprising part of the deal may be the cash component. Juniper is parting with about a third of the billion dollars in cash it held at the end of the last quarter. Coming at a time when networking companies are going to extraordinary lengths to preserve hard currency in the rough telecom equipment market, the move weighed on Juniper stock this morning, as it lost $0.51 (5.20%), trading at $9.34.

It's a bold bet that edge routing is key to Juniper's future -- as Juniper officials will be the first to tell you. Scott Kriens, Juniper's CEO, says that Juniper was primarily attracted by Unisphere's product fit and customer base.

"They have a significant number of significant customers," said Kriens, in an interview with Light Reading this afternoon. "The market was telling us this was a natural fit."

Kriens mentioned France Telecom SA, Deutsche Telekom AG (NYSE: DT), and Cable & Wireless (NYSE: CWP) as some of the significant customers that Juniper and Unisphere hold in common. In many cases, he said, the customers have been using Juniper's core routers and Unisphere's edge routers, so he sees this deal as a marriage of "best-of-breed" products. He says that Unisphere had roughly $200 million in revenues in 2001, making the deal worthwhile for shareholders.

Kriens said that Juniper's board had recently authorized using cash to buy back Juniper stock, and he saw this as a reasonable use of that cash. "It's a measure of our confidence in the combination going forward."

Some experts agree the deal is a good one for Juniper. They point to the fact that Unisphere holds many key customers, that it has managed to produce a healthy revenue stream in an unhealthy telecom market, and that its products complement Juniper's.

"This is a good deal," says Frank Duzbeck, president of Communications Network Architects. "Unisphere is doing 200 to 300 million in revenues, so the cash portion is equal to the revenue stream. They are the edge router player to fear at the moment."

When combined, Juniper and Unisphere promise to be a formidable competitor with Cisco Systems Inc. (Nasdaq: CSCO) in edge routers. Market-research firm RHK Inc. recently estimated that Cisco Systems owned 74 percent of the North American edge router market in 2001. It says Juniper accounted for 19 percent of the same market, up considerably from the 6 percent it held in 2000, while Unisphere Networks had 7 percent in 2001, up from basically nothing in the previous year (see Taking Routing to the Edge).

In addition to Cisco, Juniper, and Unisphere, a raft of startups and other public players compete, including Laurel Networks Inc., Redback Networks Inc. (Nasdaq: RBAK), and Riverstone Networks Inc. (Nasdaq: RSTN).
In fact, this morning Riverstone and Laurel made moves in the market, as each announced enhanced support for both Layer 2 and Layer 3 MPLS VPNs in their current products (see MPLS VPNs: The Talk of Supercomm).

Juniper has largely focused on providing core IP routing technology for service providers, but in the past year has become increasingly drawn to the edge -- one of the few equipment markets that remains fairly healthy during the current telecom recession. Edge routers are key because they allow service providers and enterprises to hook up new services that will drive revenues and bandwidth going forward.

Last year Juniper looked at, and then rejected, a possible bid for Redback. It looks to have concluded that Unisphere, as one of the top three players in the market, was a more attractive candidate.

One of the X factors in the new combination will be the structure and character of the combined company. German giant Siemens will now become a 10 percent owner of Juniper's stock, and it has the potential to supply Juniper with a key sales channel, particularly in Europe. Exploiting this channel and retaining key Unisphere employees will be key to success.

Juniper this morning announced a management restructuring to pave the way for Unisphere CEO Jim Dolce to become Juniper's executive vice president of field operations, which puts him in the role of interacting with most of Juniper's customers. Lloyd Carney, Juniper's recently named COO (see Juniper Creates COO Position), will become executive vice president of operations. And Marcel Gani, Juniper's CFO, will take on the titles of both CFO and executive vice president of business systems.

One major challenge for Juniper will come in maintaining Unisphere's momentum during the integration of the companies, which includes retaining key Unisphere employees such as Dolce. Juniper is located in Sunnyvale, Calif., while Unisphere is located in Westford, Mass.

Dolce, known more as a startup entrepreneur than a big-company executive, said in an interview that he intends to stay at Juniper for a while.

"Starting companies is not the best thing to be doing right now," says Dolce. "I do intend to stay at Juniper a long time."

Siemens formed Unisphere in 1999, giving the company a bunch of cash to roll up several startups. The company recently absorbed Unisphere's voice unit prior to selling Unisphere (see Siemens Absorbs Unisphere's Voice Biz).

The deal is expected to close in the third quarter of this year.

— R. Scott Raynovich, US Editor, Light Reading

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