Would Juniper Go to Extremes?

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