After the closing bell sounded on Monday, the Wall Street Journal ran a story stating that Hewlett Packard Enterprise Co. was nearing a deal to acquire Juniper Networks Inc. for $13 billion. When the story ran, Juniper’s market cap was roughly $10 billion, meaning the purchase price of $13 billion represents a 30% premium on where the stock was trading. Juniper stock saw a nice surge after-hours, while HPE investors were not so bullish as the stock fell 8%.
Deals this large have become a rarity in tech, which begs the question: Does this make sense for HPE? Over the last 12 hours, I’ve talked to many people who are bullish on the deal but also bearish, and I’ll explain how it does and does not make sense.
Why HPE should buy Juniper
In networking, the 800-pound gorilla has been Cisco Systems Inc. for more than three decades, and it uses its might to keep that position. Like Cisco, Juniper and HPE are leaders in the wired and wireless LAN Magic Quadrant, but both are substantially smaller than the market leader. According to Gartner, at the end of 2022, Cisco’s enterprise networking revenue was $24.1 billion, HPE’s was $3.7 billion (No. 4 share), and Juniper’s was $2.1 billion (No. 9 share).
The combination of the two would be $5.8 billion, moving HPE to No. 3, behind only Huawei, which isn’t a factor in the U.S. In networking, particularly when dealing with global companies, size matters, and the combined company would be better positioned to compete with Cisco.
Also, the two companies’ strengths are in different areas. Juniper’s strength is its innovation and technology, particularly in the era of Chief Executive Rami Rahim (pictured). In 2019, Juniper acquired Mist Systems Inc. to be the cornerstone of its enterprise business and has executed flawlessly, using Mist to transform from a service provider-first company to one that leads with enterprise.
It’s hard to overstate how difficult this is, particularly as a publicly traded company. Enterprise is now 38% of Juniper’s revenue, and the company expects to double that in the next three years.
Conversely, HPE’s strength is channel and go-to-market. This isn’t to say the networking portfolio isn’t strong, as it’s currently the most innovative part of HPE, but it has a massive channel and an enormous services business. In theory, combining the two has some strong synergies, bringing the best of both into one company.
From a technology perspective, the acquisition’s crown jewel is the Juniper Mist AI platform. It’s no secret that all technology vendors are differentiating in their AI capabilities, and Mist is widely regarded as the best AI platform for networking.
Yesterday, I discussed this news with Bob Laliberte from Enterprise Strategy Group. He concurred with this and said, “AI capabilities are now a key differentiator for networking vendors, and Juniper has made all the right moves with Mist. The fact that HPE is willing to pay that kind of premium to acquire it is validation of the work Juniper has put into it over the past four years.”
The last element of why this makes sense is that it brings an influx of networking talent to HPE. When HPE purchased Aruba, it also brought people such as Dominic Orr, Keerti Melkoti and Partha Narasimhan, as well as others. Since then, most have left the mothership. That’s not to say HPE is void of networking talent; a strong group of leaders is still there, but the opportunity to add people such as Rahim, Bob Friday, one of the founders of Mist, Jeff Aaron and others is certainly a boon for HPE.
Why HPE should not buy Juniper
The biggest reason why HPE shouldn’t buy Juniper is product overlap. Although adding Juniper would bring enterprise, telco, cloud and security businesses to HPE, the Mist lead enterprise segment is the star of the show.
HPE has a product portfolio that almost completely mirrors Juniper’s from the acquisitions of Aruba, Silver Peak and others. When there is this product overlap, the goal is to consolidate share, which creates integration headaches, portfolio rationalization, maintenance issues, supply chain concerns and other factors, which is why I’ve never been a fan of acquisitions for share gain as it typically leads to a “1+1=1.5” versus the desired outcome of 3.
One of the most interesting consolidation points will be what happens to Aruba Central, which is its version of Mist. The combined company won’t need both, but HPE has poured enormous amounts of time and money into it.
Also, the economics of this are complicated. On paper, the numbers aren’t bad. At $13 billion, the price implies 2.3 times enterprise value to sales and 14 times EV to free cash flow, which is reasonable for a company with the balance sheet of Juniper.
What could tip the scales negatively is that HPE isn’t cash-rich. According to HPE’s financials, the company has about $4.3 billion of cash on hand. It likely wouldn’t use all of this to fund the deal, so HPE will likely need to take on a large debt to finance the purchase. Taking on this kind of debt can hamper its ability to make other moves in the future.
Another consideration is what to do with the other parts of the Juniper portfolio, most notably security and telco. It’s unclear whether either business fits HPE’s current go-to-market. It’s possible that HPE could sell off the business unit to help pay down the debt, but security is highly competitive, as is telecom, making it difficult to get fair market value.
From Juniper’s perspective, I’d question the timing of the deal. A good deal for shareholders will always drive a sale, but Juniper is nearing the end of a multiyear transition. Given that the enterprise has finally risen to the biggest business unit inside Juniper and has seen consistent growth, it would seem prudent to let it grow organically with a bigger payoff in the future. However, for most investors, the short-term gain will always outweigh the long-term possibilities.
Although I can argue both sides, the negatives outweigh the positives. Both companies have strong portfolios and have been focused on beefing up AI capabilities. In my opinion, combining the portfolios doesn’t create enough incremental benefits to justify the purchase. If HPE had the cash on hand, the economics would be better, but it would still be hard to justify.
If HPE is going to drop this kind of money, I’d rather see it purchase, say, Nutanix Inc., which is more adjacent to HPE’s portfolio. Nutanix is interesting now as Broadcom Inc. is disrupting many VMware Inc. customers, creating an opportunity for it to step in and steal some share.
