Optical/IP Networks

Redback and Juniper Talked, Balked

It almost happened.

Redback Networks Inc. (Nasdaq: RBAK) and Juniper Networks Inc. (Nasdaq: JNPR) were a hair's breadth away from getting hitched when Juniper's stock price sank and sank the deal, at least temporarily, Light Reading has learned. On Monday Juniper made Redback an offer after extensive talks, only to have the deal collapse when Juniper's share price plummeted.

Goldman Sachs & Co. (NYSE: GS), which oversaw Redback's combination with Siara, was brought in as Redback's banker and PricewaterhouseCoopers as its auditor, the sources say. But by Wednesday, largely because of Juniper's softening shares, both sides walked away amicably and may revisit the deal in a few weeks.

Juniper's stock price has slid some $40 since February 1. Juniper shares closed down $2.75 (4.26%) to 61.81 on Thursday and were down 3.13 (5.06%) to 58.69 in midday trading Friday. In midday trading on Friday, Redback shares were down 2.38 (7.52%), at 29.19.

But wait, there's more.

Nokia Corp. (NYSE: NOK) has been looking over Redback, too. Nokia executives have stepped up communication with the company with the intent of an acquisition, but they haven't yet made an offer, according to several sources with connections to both companies. The sources confirm that Redback's talks with Nokia were initiated through its reseller relationship with Redback, with help from Randall Kruep, Redback's former sales boss who has left the company to run Procket Networks Inc. (see Kruep Leaves Redback for Procket).

In Nokia's case, a good deal of its future business rests on charging for the services it can provide when bandwidth is taken from the edge of networks, through its third-generation wireless systems, out to millions of mobile phones. Redback offers both service aggregation devices at the edge and optical transport devices to backhaul that bandwidth.

Juniper, however, might have something different in mind. Though Juniper itself is a viable alternative to Cisco Systems Inc. (Nasdaq: CSCO) in the core routing market, Redback would provide complementary technology in broadband aggregation for the edge of carrier networks.

Kleiner Perkins Caufield & Byers's Vinod Khosla, who sits on both Redback's and Juniper's boards, also lends a reason to look at the possibilities inherent in a combination of the two companies (see Vinod Khosla).

Indeed, Redback-for-sale rumors are a dime-a-dozen right now. The primary question is, could a deal possibly get done in this market climate? Though Redback's market-leading position in the subscriber management system (SMS) market and its emerging metro optical technology, the SmartEdge product, would certainly be attractive to many companies, few equipment providers are in a position to make risky acquisitions -- and shareholders are certain to rebel against share dilution in the middle of a widespread slowdown in telecom spending.

Juniper, who's share price and quarterly earnings reports have held up well, considering the disastrous state of the stock market, would certainly have a strong position in dictating the terms of the deal. That's why Juniper's share price might be the key to a deal happening.

In considering potential deals, there were plenty of skeptics. "A Redback-Juniper combination is laughable," says one New York-based hedge fund manager, asking to remain unnamed. "If Juniper's been the only one consistently putting out good numbers, why would they mess with that now?"

The deal also seems to fly in the face of Juniper CEO Scott Kriens's strategic approach. He has said in the past that Juniper will focus purely on packet-processing, rather than becoming directly involved with optical transport (see Scott Kriens ).

Redback, however, might bring out multiple suitors. High-level sources with ties to Cisco, top-tier investment banks, and Redback have all confirmed that Cisco has talked of making an offer for Redback as a defensive move to prevent any possible combination with Juniper. "[Cisco's chief strategy officer] Mike Volpi has told [Redback chairman] Pierre R. Lamond that if Juniper makes an offer, Cisco will pay more," one investor close to Cisco and Redback told Light Reading.

Interestingly enough, Cisco, the most savvy at acquiring other firms, is the longshot here. "The [Redback] team is not as interested in becoming a part of Cisco," a source with knowledge of Redback says.

So what does all this mean? Mostly it reiterates what Redback watchers have known for a while: The company isn't as surefooted now as it was when it was taking the SMS market by storm. Redback shares are down 82 percent since Oct. 1 of last year.

Redback's product mix is still shifting from its higher-margin SMS products to its lower-margin SmartEdge optical products, all at a time when carrier capital spending and inventory gluts threaten business continuity. Also, the firm's much anticipated IP packet processing cards for the SmartEdge optical platform are still a quarter or two away. Investors have punished Redback shares for the company's declining gross margins and rising days of sales outstanding.

Some industry analysts were perplexed at the suggestion that Redback and Juniper might someday combine. "Juniper doesn't need any new sales channels -- everyone knows who they are. And there are quite a few companies doing subscriber management and next-generation Sonet, so it's not clear why Juniper would want to buy [Redback] for that," remarked Scott Clavenna, president of PointEast Research LLC and director of research at Light Reading.

Redback and Goldman Sachs declined to comment for this article. Juniper, Nokia, and Cisco did not return phone calls by press time.

-- Phil Harvey, Light Reading http://www.lightreading.com

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