Juniper Rides the Rumor Rollercoaster

Fakenews

By: R. Scott Raynovich

For a brief period yesterday, Juniper (JNPR) was feeling the love from investors, with shares up as high as much as 20 percent in after-hours trading on rumors that was going to be acquired by Finnish networking company Nokia (NOK). Just 12 hours later, the stock has fallen six percent today -- below the price where the rumors started -- as the notion was dashed by the would-be acquirer.

Nokia put to bed the speculative notion that it was ready to pay a generous premium over the current $10.4 billion market value for Juniper, a long-time networking equipment specialist. The company took the unusual step of issuing a statement this morning:

"While Nokia does not typically comment on market rumors, given the specificity of press reports related to a potential acquisition of Juniper Networks, the company issued the following statement: "Nokia is not currently in talks with, nor is it preparing an offer for, Juniper Networks related to an acquisition of that company."

$16 Billion Seems High

The original report about a potential buyout by Nokia appears to have originated at CNBC. Other media and research outlets jumped on the report, including Light Reading and TheStreet.com.

The reported offer from Nokia, which has now been denied, was $16 billion, about a 40 percent premium to the current stock price. That would have been a 19X multiple on Juniper's consensus estimates of $2.15 earnings per share in 2018. As Morningstar pointed out, that's a rich deal over Juniper's current share price. Morningstar analyst Ilya Kundozerov found it "difficult to justify such a transaction for Nokia given significant product overlap in its service provider switching and routing segment." 

Indeed, justifying a 40 percent multiple in the era of IP router commoditization would be difficult -- which may be why the deal did not exist and the market should have been more skeptical. Recent premiums on tech deals have generally been less than 20 percent.  

Commoditization Drives Change

Funny thing is the deal kind of makes sense -- if you ignore the speculated price. Mega consolidation has been going on for years in the networking equipment space, especially in the telecom equipment market, where Juniper is heavily focused. Juniper and Nokia are partners in many areas. Juniper's growth has stagnated, and many tongues in the industry have been wagging about what it's going to do about its future.  It's also been under pressure from activist investors who would like the company to shrink staff and hand out more cash to investors.

Right now, Juniper is seen by many as an aging IP router vendor in the era of hardware commoditization. It's outmanned by much larger competitors including Cisco (CSCO), Ericsson (ERIC), Nokia, and Dell. But the company has a strong intellectual property (IP) portfolio, a respected engineering staff, and $3 billion in cash. Why not merge, streamline staff with the acquirer through corporate synergy, and generate more earnings?

So what's next? It's pretty clear that Juniper should be looking at options, as the pressure to merge in this industry is high. Beyond mergers, private equity might be another option for Juniper -- though its valuation stretches the range of most recent private-equity deals in the technology space, which have generally been under $4 billion. But many private equity firms such as Elliot Management and Thoma Bravo have been active in the space. For example in 2014, Thoma Bravo took networking specialist Riverbed Networks private for $3.6 billion