HPE's $14B bid for Juniper could be bad news for telecom

Fruity by name, fruitful by nature. HPE must hope that's true of Juniper Networks after this week saying it will splash $14 billion on a takeover. The move followed reports originating with the Wall Street Journal and marks perhaps the biggest takeover in the network equipment sector since Nokia spent €15.6 billion (US$17.1 billion, at today's exchange rate) to buy Alcatel-Lucent in 2016. But it has already generated some industry concern about the ramifications for the telecom market and may have consequences for companies that are not a part of the deal.

First, the specifics. HPE's stated main interest is Juniper's network-related expertise in artificial intelligence and the cloud. Its statement on the deal draws particular attention to Juniper's own cloud platform as well as its Mist AI technology, which uses data analytics and machine learning to address network problems and improve the customer experience. This would hold obvious attractions for HPE and its "Intelligent Edge" enterprise networks unit, built largely on the $3 billion takeover of Aruba Networks in 2015 and now generating quarterly revenues of more than $1 billion.

"Juniper appears to have been fairly successful at extending the AI properties it acquired with Mist to a wider range of AIOps capabilities for the enterprise," said Jennifer Pigg Clark, a principal analyst with Heavy Reading (a Light Reading sister company). "HPE has been seeing some success with its cloud-as-a-service solution, GreenLake, and I'm thinking that it may be further enabled by Juniper's Mist technology."

Double the size

All this helps explain why HPE is prepared to pay a cash fee of $40 per share for Juniper, valuing the company at a 32% premium to its share price before there were rumors of a deal. HPE believes a combination of Juniper and its own assets will effectively double the size of its networking business when the deal is finalized later this year or in early 2025 (it needs to pass muster with shareholders and regulators first). In its last fiscal year (ending in October 2023), HPE made sales of $29.1 billion, including $5.2 billion from Intelligent Edge, a 42% increase on the previous year's figure. Yet to publish 2023 results, Juniper reported revenues of $5.3 billion last year.

This $10.5 billion business is to be led by Juniper CEO Rami Rahim, which raises questions about the role, if any, that Phil Mottram, the current general manager of the Aruba unit, will play in future. HPE sees an opportunity to realize annual cost savings (or what it euphemistically calls "synergies") of $450 million through the takeover within three years of its completion. It also expects networks to account for 31% of total HPE revenues in future, up from 18% for the 2023 fiscal year, and to contribute more than 56% of HPE's total operating income.

Any merger triggers anxiety about job cuts and Juniper announced plans to cut 440 jobs, about 4% of its workforce, as recently as October. When those cuts are factored in, the combined entity would have a headcount of 72,460, based on the most recently available figures. But it seems bound to be smaller after those synergies take effect.

For all the talk of artificial intelligence and the cloud, a deal of this magnitude is as much about revenues, customers and market share as it is technology, according to Pigg Clark. There could also be implications for Ericsson as a long-standing partner of Juniper, she thinks. "About every three to five years there's a rumor that Ericsson will buy Juniper – but it never quite happens," she told Light Reading via email before HPE's move for Juniper had been confirmed. "HPE is also cordial with Ericsson. I wonder, if HPE buys Juniper, if that ends up being good news for Ericsson and HPE/Ericsson becomes a bigger thing."

Indeed, under a partnership announced in 2018, Ericsson claims to have bundled its 5G expertise with Juniper's capabilities in the edge and core networks to provide a more comprehensive offer for customers so inclined. HPE, meanwhile, is angling for a bigger role in the macro telecom network. The kind of server equipment it previously sold to IT companies is increasingly being used to support telecom network software.

Telecom anxiety

One analyst, though, is worried about the potential absorption into the enterprise-focused HPE of a supplier that has played such a big role in telecom. "A standalone Juniper has been solidly committed to the service provider market, but, given HPE's mandate and the current status of service provider versus enterprise in Juniper itself, it's not clear to me what would happen to the service provider business in a combined company," said Sterling Perrin, a senior principal analyst with Heavy Reading.

Juniper's service provider business has been stagnant, Perrin notes, and its cloud business has declined sharply. That shows in the last set of financials, with service provider sales relatively flat for the first nine months of 2023, at about $1.4 billion, and cloud revenues dropping 17% year-over-year, to $846 million. Growth was driven entirely by enterprise sales – up 35%, to more than $1.9 billion.

"It would be a shame for the Juniper service provider business to languish – or be shed – because Heavy Reading research shows that service providers view Juniper as an innovator," said Perrin by email. "And telecom desperately needs innovators, like Juniper. IP [Internet Protocol] over DWDM [dense wave division multiplexing] combined with automation/machine learning has placed Juniper in a very good long-term position in telecom. But this would require a patient acquirer."

It may trouble stakeholders in telecom that HPE had so little to say about their sector when justifying its bid for Juniper in this week's official statement. Based on results for the most recent fiscal years, Juniper's service provider business would account for just 18% of revenues at HPE's new-look networks division. And if 2024 is anything like 2023, its contribution will further diminish. Sadly, for many vendors with a telecom focus, patience has yet to pay off.