The company's $3.4 billion purchase of NetScreen gives it much-needed security clout and the ability to go where it swore it wouldn't: the low-end corporate market.
The company's announcement Monday that it will exchange stock worth about $3.4 billion for security hardware maker NetScreen Technologies gives Juniper clout in network protection technologies, an area that's been a relative bright spot recently amid anemic network gear sales. The move has its risks, however, bringing the company into markets it has avoided in the past, where it faces tough competition from chief rival Cisco Systems.
The NetScreen deal signals a major shift for high-end networking equipment maker Juniper, which has concentrated on products geared for large telecommunications and Internet backbone providers rather than networking hardware needed to run businesses. Previously, Juniper executives had claimed that they would never court corporate buyers, considered the "low end" of the networking market.
The NetScreen deal signals a major shift for Juniper, which has concentrated on products geared for large telecom and Internet backbone providers rather than networking hardware needed to run businesses. Some analysts say the change is a good move for Juniper, but integration of the two companies won't likely be easy.
The deal comes amid signs of a turnaround for the network sector, with both Juniper and Cisco posting profitable quarters. Juniper's profits exceeded analysts' revenue targets for the last quarter of 2003, the company said in January. Cisco's earnings inched past Wall Street estimates for the last quarter of 2003, even though the company's chief executive officer said customers may still be cautious about spending.
Momentum in security--as well as in storage and wireless--were among the reasons cited for the rebound.
Cisco dominates both the high and low ends of the network gear market. The company garnered about 65 percent of the market for core and edge routing equipment used by Internet service providers in 2003, according to Infonetics Research. Juniper nabbed about 19 percent of the $3.1 billion market for the same period.
The NetScreen purchase puts Juniper squarely in the running for corporate business. NetScreen, which builds virtual private network (VPN) and firewall products, generates roughly 75 percent of its business from corporate sales.
"Juniper has done a great job competing with Cisco for the telecom router business," said Jeff Wilson, principal analyst for network security at Infonetics Research. "Yet a company that can compete with Cisco in the enterprise needs security in its products. This is a great start towards building that company."
For years, Juniper CEO Scott Kriens has been critical of Cisco's strategy of offering a broad range of products that address both the corporate and carrier market. Previously, he claimed that Juniper could better serve its carrier customers, because it was focused only on their particular needs.
Anticipating criticism for its shift in strategy, Kriens tried to justify the company's change.
"The question is not whether the network is service provider or enterprise," Kriens said during a conference call. "Those distinctions are outdated."
He said that in the future, end customers will use a combination of network elements that they build for themselves along with services obtained from carriers. He also noted the growing importance of security in these networks and said Juniper's products, as a result of the NetScreen deal, will address these concerns.
Some analysts said the change in strategy is a good move for Juniper.
"Although end customers and sales channels for both companies differ significantly, we believe this combination is likely to improve Juniper's longer-term positioning," Mark Sue, an analyst at Unterberg Towbin, wrote in a research note. "The deal combines two best-of-breed companies with similar cultures, like-minded visions, proximity in accelerating markets."
Under the terms of the deal, Juniper will exchange about 1.4 shares of its own common stock for each outstanding share of NetScreen. Juniper's stock price was $29.47 at the market's close on Friday, making the deal worth more than $3.8 billion and giving NetScreen shareholders a 57 percent premium for their shares. However, Juniper's stock price declined 10 percent Monday, reducing the value of the deal to about $3.4 billion.
The companies said they expect the deal to close during the second quarter of 2004, if the merger successfully garners shareholder and regulatory approvals.
Urge to merge
Juniper's intended purchase of NetScreen continues a trend toward consolidation in the network security market.
Security technology company Symantec bought secure networking firm SafeWeb last fall and four security companies the year before. Rival Network Associates bought two companies last year to strengthen its focus on detecting intrusions. Meanwhile, firewall software maker Check Point Software Technologies focused its efforts on offering a more integrated and easily managed approach to securing corporate information systems.
With NetScreen, Juniper vaults into
the security market and squares off
credibly with Cisco for combined
networking and security deals.
Moreover, the deal should help Juniper appeal to government buyers. Although the company has not broken out sales to the federal government in its earnings, it is focusing more on the sector and recently set up a separate sales division to handle government contract bidding.
Security has been a missing key element in Juniper's government business strategy. Cisco, which has a wide offering of VPN and firewall products, has been better able to address security concerns with its offerings.
"You need to be able to provide a total solution when addressing government business," Scott Spehar, a Cisco vice president, said during a company-sponsored event in Washington, D.C. "It's important to offer security along with the routing and switching. It's definitely more important today than it was three years ago, and I think it's going to be even more important three years from now."
While the acquisition could be a boon for Juniper, the integration of the two companies won't likely be easy. Juniper will need to incorporate about 900 people into its 1,600-employee organization.
Juniper has acquired companies in the past with varying degrees of success. In May 2002, it bought privately held Unisphere Networks for $740 million. Unisphere's edge-routing gear fit in well with Juniper's offerings. Like Juniper, Unisphere focused on the carrier market. The merger provided Juniper with a set of products it did not have. It also allowed the company to address new markets such as broadband aggregation and subscriber management.
But Juniper has struggled with at least one other acquisition. In 2001, it bought Pacific Broadband, a company that made cable modem termination systems, for about $200 million. The acquisition was supposed to help Juniper compete with Cisco in the cable market. But two years later, the company gained little traction with the product and discontinued it in August 2003, deciding instead to partner with Arris International, one of the many companies it competed with in that market.
"Juniper's acquisitions in the past haven't exactly worked well," RHK's Al-Chalabi said. "They have their work cut out for them."