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Juniper To Buy Extreme?

Light Reading
News Analysis
Light Reading
7/9/2000

The investment bank of Credit Suisse First Boston is preparing a $10 billion merger of two prominent networking companies in the coming week, and a likely combination includes Juniper Networks Inc. (Nasdaq: JNPR) and Extreme Networks Inc. (Nasdaq: EXTR), according to sources close to the bank.

A Juniper/Extreme combination seems to make sense. The size of the deal--$10 billion or possibly higher--precludes most private companies without significant revenues, according to most financial experts. Juniper has been actively searching for an acquisition target, and Extreme is looking for a way to move out of its enterprise networking market and into the accounts of large telecommuniations players.

With Juniper's market capitalization of $46 billion and Extreme's market capitalization of around $6 billion, the price also seems right -- with a premium being paid to Extreme shareholders. If the deal were priced at $10 billion, Juniper would give up approximately 18 percent of the company for revenues of equivalent size. For the fiscal year ending in March, Extreme reported $197 million in revenue and $22 million in profit. During the same period, Juniper reported $154 million in revenue and $6 million in profit. Juniper trades at a higher multiple primarily because analysts believe it has a higher growth rate and is pursuing a larger market.

Most of the publicly held next-generation networking players, such as Sycamore Networks Inc. (Nasdaq: SCMR) and Redback Networks Inc. (Nasdaq: RBAK), have market caps in excess of $20 billion, making them less attractive as acquisitions. And unlike some of the private companies whose valuations may approach $10 billion, Extreme has a growing revenue stream and a viable sales channel.

Many analysts said there would only be a handful of private companies without revenue that could earn a $10 billion price tag.

"For something in the core cross-connect or long-haul market, the price might be right, but for most applications $10 billion is too high " says Max Schuetz, an analyst with Thomas Weisel partners.

Gina Sockolow, analyst with Brean Murray, noted that there is a natural attraction between Juniper, Redback, and and Extreme, because they offer "best-of-breed" products in their respective categories--IP routers, subscriber management, and Gigabit Ethernet switches--that are threatening Cisco's grip on the networking market.

"If you combined these companies, you would see that together they've taken up to 10 percent of Cisco's market," says Sockolow.

Cisco was rumored to be in negotiations with Redback Networks, but these rumors had no validity, said Sockolow.

Another possible acquisition target is Corvis Corp.--though most believe that founder and CEO David Huber is bent on completing an IPO for the company, now scheduled for late July.

--R. Scott Raynovich, Executive Editor, and Stephen Saunders, U.S. Editor, Light Reading (http://www.lightreading.com)

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