By Kayley Portelli, William Hodgson, Jingheng Xu, Nancy Huang (University of Melbourne) ; Nathaniel Baker, Alyssa Serebrenik, Samuel Tainsky, Augustus Paluzzi (Cornell)
Photo: Luca Bravo (Unsplash)
Overview of the deal
Acquirer: Hewlett Packard Enterprise Company (HPE)
Target: Juniper Networks, Inc.
Implied Equity Value: $11.8 billion
Total Transaction Size: $14 billion
Closed date: 4Q24E
Target advisor: J.P. Morgan Securities LLC and Qatalyst Partners (financial) ; Wachtell, Lipton, Rosen & Katz, Covington & Burling LLP, and Freshfields Bruckhaus Deringer LLP (legal)
Acquirer advisor: Goldman Sachs & Co. LLC (financial), Skadden, Arps, Slate, Meagher & Flom (legal)
As a part of Hewlett Packard Enterprise Company’s (NYSE: HPE) efforts to expand its high-margin and sustainable growth strategy, the company will acquire Juniper Networks, Inc. (NYSE: JNPR) to utilize its AI Technology in its digital networking and cloud services.
This acquisition will make HPE a leading provider of cloud services that provide customers with opportunities to grow their digital network in tandem with their operations. With an emphasis on usability and reliability, the AI-driven solutions program will help users collect, analyse, and act on opportunities that will arise as users input data and utilise its frame-based network. As a result, HPE’s networking segment will grow by approximately 10% within the next fiscal year.
HPE will also benefit from run-rate annual cost synergies of nearly $450 million within 3 years, thanks to newfound administrative efficiencies as well as ease of maintenance and growth for internal developers. The transaction’s funding will be based on financing commitments for $14 billion in term loans, with repayments planned for the next two years as part of the company’s goal of reducing its leverage to approximately 2x. Juniper Networks’ CEO Rami Rahim will lead the combined HPE networking business, with HPE President and CEO Antonio Neri continuing his position.
“This transaction will strengthen HPE’s position at the nexus of accelerating macro-AI trends, expand our total addressable market, and drive further innovation for customers as we help bridge the AI-native and cloud-native worlds, while also generating significant value for shareholders.” - Antonio Neri, President and CEO (HPE)
Company Details (Acquirer - Hewlett Packard Enterprise)
Hewlett Packard Enterprise, the spinoff of the more commonly known information technology giant HP, was established in 2015 with a focus on providing hardware and software services and solutions. HPE is enterprise-facing and caters to a variety of industries, ranging from traditional sectors such as manufacturing and financial services to media, health and telecommunications industries. HPE’s long-term strategy is to deliver a global edge-to-cloud platform as-a-service to help customers accelerate outcomes by unlocking value from all of their data. HPE provides a comprehensive portfolio through a range of subscription and consumption-based, pay-per-use, and aaS offerings. Similar to other tech giants, a large part of HPE’s growth comes from acquisition of other growth tech companies. Since its IPO in 2015, HPE has completed 50+ acquisitions and investments into high growth information technology companies, however, none are comparable to the size and scale of Juniper.
Founded in 2015, headquartered in Spring, Texas (USA)
CEO: Antonio Neri
Number of employees: 62,000
Market Cap: $19.88bn (as of 31/01/2024)
EV: $29.12bn
LTM Revenue: $29.13bn
LTM EBITDA: $5.12bn
LTM EV/Revenue: 1.00x
LTM EV/EBITDA: 5.69x
Recent Transactions: $412m acquisition of Axis Cyber Security Ltd (Mar 2023) ; $925m acquisition of Silver Peak Systems, Inc. (July 2020) ; $1.4bn acquisition of Cray Inc. (September 2019)
Company Details (Target - Juniper Networks. Inc)
Juniper Networks is a technology company based in Sunnyvale, California, that designs, develops and sells network products such as high-bandwidth routers, AI-enabled enterprise networking operations, and internet security products. Furthermore, it offers services to support these products, such as training, maintenance, and Software-as-a-Service ("SaaS"). These products and services are aimed to help customers build reliable, secure, and automated networks for their businesses.
Founded in 1996, headquartered in Sunnyvale, California (USA)
CEO: Rami Rahim
Number of employees: 10,901
Market Cap: $11,907.7 (mm) (as of 1/30/2024)
EV: $12,399.9 (mm)
LTM Revenue: $5,564.5 (mm)
LTM EBITDA: $762.8 (mm)
LTM EV/Revenue: 2.2x
LTM EV/EBITDA: 15.3x
Projections and Assumptions
Short-term consequences
Following the announcement on January 9th, 2024, of HPE’s monumental $13.6 billion acquisition under CEO Antonio Neri’s leadership, Juniper Network’s shares surged 22% in late trading on Tuesday, reaching $36.88, their highest level since the spring of 2022. In contrast, Hewlett Packard Enterprise stock experienced an approximate 8% decline, highlighting the market’s apprehension regarding potential overlap in product portfolios, duplicated efforts by sales teams, and concerns about customer reach.
The integrated entity is strategically focused on achieving operational efficiencies, targeting an annual cost synergy of $450 million within 36 months post-closure. Juniper's CEO, Rami Rahim, is set to lead the combined HPE networking business. The transaction is anticipated to be accretive to non-GAAP EPS and Free Cash Flows in the initial year.
However, the $14 billion all-cash transaction is funded through term loans, incorporating a mix of new debt, mandatory convertible preferred securities, and cash. This financial structure may place a substantial burden on the company's balance sheet, potentially influencing strategic decisions such as share buybacks, and dividend payouts. Fitch Ratings has reaffirmed HPE's senior unsecured ratings at 'BBB+' and HPE and Hewlett Packard International Bank's Short-Term CP ratings at 'F2'. The vigilant monitoring of credit ratings remains imperative in this context.
Furthermore, considering the potential overlap between Juniper’s enterprise networking business and HPE’s Aruba Networking division—both targeting the same customer reach and product line—a question arises regarding HPE’s strategic direction. This is particularly noteworthy as HPE has recently positioned itself as a cloud services provider facilitating hybrid cloud environments. The management team at HPE needs to navigate these overlaps diligently, ensuring the preservation of service quality and technology continuity during the integration process.
Long-term Upsides
The procurement of Juniper Networks by HPE marks a pivotal and forward-thinking step, promising to significantly strengthen HPE's standing in the networking realm.
By doubling its networking business through this acquisition, HPE will broaden its reach in the networking industry, offering a more comprehensive suite of solutions. This strategic expansion places HPE at the cutting edge of technological progress, in an era where robust networking is fundamental to global connectivity and data exchange. This forward-looking approach ensures alignment with future technological trends, positioning HPE as a key player in digital innovation and transformation.
This deal strategically aligns with HPE's edge-to-cloud strategy, positioning HPE to effectively adapt to the future landscape of AI-native markets. This provides a sustainable competitive advantage and ensures HPE remains at the forefront of technological advancements, driving continuous innovation and securing its place as a leader in the tech industry for years to come.
Furthermore, the acquisition can transform industry dynamics. The integration of Juniper's advanced technology and specialised talent into HPE's framework promises to shift the competitive balance, positioning HPE as a strong contender against established industry leaders like Cisco. This could disrupt the current market equilibrium, setting HPE on a trajectory for sustained market influence and securing a dominant position in coming years.
Lastly, the merger's expected operational advantages, especially the significant $450 million in cost synergies, imply a long-term shift for HPE towards agility and efficiency. This streamlined operational model is essential for enduring growth and a reinforced global market presence in years ahead.
Risks and Uncertainties
This acquisition represents a shift towards a more integrated outlook for HP, a firm typically known for its hardware offerings in the computing space. As such, this acquisition marks a shift both in the network market but also a shift for HP towards a more streamlined and vertically integrated model. In a market dominated by tech stocks and AI based speculation HP may be seeking to ride existing macroeconomic tailwinds towards a higher valuation such as firms like Meta or Alphabet. Acquisition of Juniper's proprietary AI Marvis exposes the firm to a great deal of possible upside in an AI driven market but also introduces a great deal of risk as the relative importance of this specific AI tool is unclear yet in the broader AI landscape. The esoteric valuation of AI based firms has driven scepticism from investors and introduces a great deal of risk for firms such as HPE given its newfound acquisition of such AI based services. There are also concerns of potential IP overlaps across the two firms in question which may contribute to inefficiencies which could potentially dampen returns in the short term. Given the existing portfolio similarities of the two firms it is also possible that company culture may suffer internally as various divisions are trimmed down.
“The combination of HPE and Juniper advances HPE’s portfolio mix shift toward higher-growth solutions and strengthens its high-margin networking business, accelerating HPE’s sustainable profitable growth strategy. The transaction is expected to be accretive to non-GAAP EPS and free cash flow in the first year post close.” - HPE Press Release (HPE to Acquire Juniper - Press Release)
““HPE’s acquisition of Juniper represents an important inflection point in the industry and will change the dynamics in the networking market and provide customers and partners with a new alternative that meets their toughest demands” - Antonio Neri CEO of HPE (HPE to Acquire Juniper - Press Release)