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With buy, Cisco foes will join forces

Juniper Networks is not a rival that Cisco takes lightly, an analyst says. And now that the company is merging with Unisphere, the battle may intensify.

    Juniper Networks said Monday that it plans to acquire rival router maker Unisphere Networks in a cash and stock deal worth roughly $740 million.

    The deal combines the two primary rivals to Cisco Systems in the markets for Internet routing technology. Unisphere was once thought to be a likely candidate for an initial public offering. However, the IPO market for telecommunications-related companies has soured in the past year amid a sharp decline in the fortunes of network operators like Qwest Communications International and Global Crossing.

    Under the terms of the deal, privately held Unisphere will receive $375 million in cash and 36.5 million shares of Juniper stock. Shares of Juniper were down about 5 percent, to $9.35, in morning trading. The company's stock is trading far below the October 2000 high of $243 that came at the tail end of a telecom boom.

    The deal is slated to close in the third quarter of this year, Juniper said.

    Juniper is Cisco's primary rival at the high end of the routing market, where the two companies battle for the business of large telecom companies. Unisphere's primary market is also network operators, but it focuses on the junction point--or "edge"--where a network operator connects to a business customer. That's one of the few growth markets in the telecom industry, analysts say.

    "Juniper is not a competitor that Cisco takes lightly," said Chris Nicoll, an analyst with market researcher Current Analysis. "Unisphere has beaten Juniper at the edge. Bringing them together certainly gives them more muscle."

    Routers serve as a sort of "post office" for data, shuttling information to its destination based on Internet Protocol, or IP, at both a network's core and at other junction points along the way.

    Cisco holds the market share lead in both of the markets that the combined Juniper-Unisphere will serve. Juniper has lost market share to Cisco during the past year after gaining nearly 40 percent of the market at one point during the boom. But Cisco has since refocused its efforts on its routing business and fought off Juniper.

    Cisco holds an 85.5 percent share of the overall router market, compared with Juniper's 6.4 percent share, which shrunk from 8 percent the previous quarter, according to recent research released by industry watcher Dell'Oro Group.

    Siemens to get a stake
    As part of the deal, Juniper also struck a global pact with Unisphere's largest shareholder, German technology giant Siemens. Siemens will now own 10 percent of Juniper when the deal closes.

    Gartner analysts Tim Smith and Jay Pultz say that the planned acquisition of Unisphere Networks by Juniper Networks will benefit Juniper and Siemens, which is Unisphere's largest shareholder.

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    Siemens plans to resell Juniper and Unisphere technology as part of a global reseller agreement, a potential boon to Juniper since Siemens says it has a sales presence in 190 countries.

    Juniper Chief Executive Scott Kriens said in an interview that an unintended benefit of the precipitous downturn in the telecom market is that companies that relied on the boom and its associated hype to survive will continue to disappear, leaving more room for the survivors, such as Juniper and Unisphere.

    "It gets the spectators off the field," Kriens said. "The whole telecom industry will not come back. What will come back is an IP industry."

    Kriens and Unisphere Chief Executive Jim Dolce said the two companies started to explore the possibility of an acquisition in 2001. At one time in 2001, Juniper was interested in striking a deal with Redback Networks, a company that has since emerged with its own edge router.

    Siemens has been rumored to have been looking for a way to cash out of Unisphere, a company it created by buying three start-ups in 1999 at the height of the telecom boom.

    "In today's market, (Unisphere) has been very successful," Nicoll said. "We have to be careful not to judge companies on what happened in the market two years ago."

    Juniper already has an extensive alliance with another European telecom and technology giant, Ericsson. Kriens said Ericsson would continue to be a "key strategic partner," and he did not anticipate any changes in Juniper's relationship with them. Ericsson has an exclusive agreement to resell Juniper's recently introduced J20 router for wireless networks. It also resells Juniper's entire portfolio of products, as will Siemens.

    There are not expected to be significant layoffs as a result of the deal, according to executives from both companies. "We didn't do this deal in order to shave overhead," Dolce said.

    Unisphere, like other small companies in the tough climate, had few options other than being acquired, despite garnering a solid share of the market for edge routers.

    "After much speculation over the last 12 months about industrywide consolidation, it may be finally beginning as valuations bottom out and cash-strapped firms have no other option other than to get acquired as a financial exit," Bill Lesieur, an analyst with market researcher Technology Business Research, said in a report.

    Juniper will realign its executive team at the close of the deal. Unisphere's Dolce will become executive vice president for field operations; Juniper Chief Operating Officer Lloyd Carney will become executive vice president of operations; and Marcel Gani, Juniper's chief financial officer, will add executive vice president of business systems to his title.