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EMC-Juniper Deal? Not So Fast, Say Analysts

Citi’s Kevin Dennean reiterated his Buy rating on Juniper today, but doesn’t see the logic behind a sale from Juniper’s standpoint: “While we have no direct insights into JNPR’s supposed hiring of an investment bank or supposed receipt of an offer to purchase the company, we definitively do not believe JNPR is shopping itself at this time. Simply put, we don’t think the set-up is ripe for a company-driven sale: JNPR has major product cycles just kicking in (T4000 core router upgrade, PTX converged transport solution, QFabric data center solution), still-healthy margins (down significantly from 2010 levels, but a still-healthy 15% operating margin last quarter), solid cash flows ($212mln CFO, $124mln FCF last quarter), and healthy balance sheet ($3.4bln cash & ST investment, $2.4bln net cash). We don’t see JNPR as a company in distress or facing the existential challenges/risks that would typically motivate a sale.”

Elsewhere, Wells Fargo’s Maynard Um, who has an Outperform rating on EMC, also criticized the likelihood of that company’s purchase of Juniper. He notes that deals of this size are unusual, and EMC would do better to take on a smaller target: “We believe the recent hiring of a CTO with primarily networking background as well as the potential softening of the relationship with Cisco (partially believed due to VMWare’s (VMW) acquisition of Nicira and recently announced server partnership with Lenovo) has raised an increasing view that EMC may be interested in acquiring a networking asset. Given our view that EMC will grow to be a key competitor that offers a full solution (selling the stack of storage, servers, networking, software, and networking), we believe this has merit. However, we do not believe JNPR would be an attractive target because (1) the majority of Juniper’s business is from the service provider segment, (2) Juniper has limited data center presence and its key data center platform (Qfabric) has garnered little traction, (3) the EMC, Cisco, VMW JV is, in our opinion, unlikely to unwind at this point in time, and (4) EMC recently hired a new CTO with networking background, which we think suggests EMC is unlikely to make a large acquisition. Brocade, which has been mentioned in multiple media outlets as another possible acquisition target, has good networking assets but also supplies EMC’s competitors, the revenue from which could be at risk if acquired by EMC and, hence, in our view, making it less attractive. Privately-held Arista Networks, which is focused on data center networking fabric, could be an interesting acquisition, as has been speculated in the press, though the recent hire of Michael Lehman as CFO suggests, to us, an IPO route (Arista’s press release notes that Mr. Lehman led former companies through the process of becoming “IPO ready”).”
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