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HPE acquires Juniper for $14 billion


Vice President: Aaron Cohen 

Analysts: Arnav Aggarwal, Aman Gogna, Fynn Hirrlinger, Kostadin Iliev, Shreyansh Jain (Scholaride),  Himanshu Mittal (Scholaride), Benedict Walton-McBain 


Deal Overview 


Acquirer: Hewlett Packard Enterprise (HPE) 

Acquiree: Juniper  

Deal Size: The deal has an equity value of approximately $14 billion 

Buy Side Advisors: J.P. Morgan Securities LLC and Qatalyst Partners 

Sell Side Advisors: Goldman Sachs & Co. LLC (Financial advisor), Skadden, Arps, Slate, Meagher &  Flom (Legal Council) 


Business Overview 


Hewlett Packard Enterprise 


Hewlett Packard Enterprise (HPE) is a spin-off branch of the original Hewlett Packard company founded in  1939 by Bill Hewlett and David Packard in a garage which is widely considered the birthplace of Silicon  Valley. HPE was created in 2015 when the Hewlett Packard company decided to split its business into two.  Since then, HP inc. took over the business of personal computers and printers and HPE took over the corporate  clients solutions business.  


Headquartered in Spring, Texas, HPE deals with a range of clients from small-and-medium-sized businesses  (SMBs) to large global enterprises and governmental entities. The core business lines of HPE are Hardware  Solutions; Software Solutions; IT Services; Hybrid Cloud Solutions; Edge Computing; High-Performance  Computing and Cybersecurity. HPE's primary emphasis lies in implementing edge-to-cloud computing  strategies, leveraging the company's advancements in high-performance computing and artificial intelligence. 


Juniper Networks 


Founded in 1996 and headquartered in Sunnyvale, California, Juniper Networks is a company that initially  made its name by offering core routers which then transformed into offering edge routers. With time, however,  the company transformed itself into a software solutions provider. Services such as Networking Hardware;  Software-defined Networking; Security Solutions; Cloud Networking; Software and Services;  Telecommunications Infrastructure and Enterprise Networking encompass Juniper’s main goal of reducing  the operating expenses of its clients by providing superior software solutions. What makes the company stand  out is its use of cutting-edge Artificial Intelligence which allows IT teams to not spend so much time on maintaining basic network connectivity and lets them focus on providing the best possible end-to-end  experience. Juniper Networks boasts a very large number of clients, including 18 of the top 20 largest global  banks as well as 8 of the top 10 global retailers.  


Industry Analysis 


Hewlett Packard Enterprise (HPE) and Juniper Networks are prominent players in the enterprise network  solutions industry. This sector encompasses a wide range of networking hardware, including switches, routers,  and wireless access points tailored for large-scale use. Additionally, it incorporates the software needed to  support, manage, and safeguard these network resources. It is a fragmented industry and features a robust  presence of regional competitors and is witnessing a shift from product-centric to service-oriented solutions. 


Networking products and services are indispensable for the operation of organizations worldwide. Businesses  handle vast amounts of data that must be efficiently accessible across various devices. The increasing trend of  remote work has accelerated the shift from LAN-based infrastructure to wireless solutions, thereby driving the  demand for advanced networking products and services. In 2022, the global enterprise networking market was valued at USD 397.79 billion. It is projected to increase  to USD 409.92 billion in 2023 and reach USD 521.30 billion by 2031, growing at a compound annual growth  rate (CAGR) of 3.05% from 2024 to 2031.



Geographically, North America dominates the market, driven by advancements in technologies such as cloud  networking, DevOps, network analytics, and virtualization. The region also leads in research and development,  hosting many of the industry's major players. Meanwhile, growth in Asia-Pacific and other developing regions  is expected to be driven predominantly by cloud-based solutions. 


The future of the enterprise networking industry looks promising with the rapid expansion of digitalization  and the emergence of technologies such as 5G, the Internet of Things (IoT), Advanced Driver-Assistance  Systems (ADAS), and the adoption of smart, connected devices. These developments suggest a potential  explosion of new applications and opportunities in the coming years. 


Deal Rationale 


HPE anticipates that the acquisition will significantly augment its networking business, effectively doubling  its existing market presence (HPE, 2024). The integration of Juniper's portfolio of networking solutions into  HPE's offerings is expected to unlock new revenue streams and enhance cross-selling opportunities. With  Juniper's strong foothold in AI-native networking and cloud-delivered solutions, HPE aims to capitalize on  the growing demand for secure and intelligent connectivity in hybrid and multi-cloud environments (HPE,  2024). By leveraging Juniper's technology and market expertise, HPE seeks to accelerate innovation and  deliver cutting-edge networking solutions that cater to the evolving needs of enterprise customers.  Additionally, Juniper's established customer base and global sales network present HPE with opportunities to  expand its market reach and drive organic growth (HPE, 2024). Overall, the synergies derived from combining  HPE and Juniper's complementary capabilities are expected to drive top-line growth and bolster HPE's  competitive positioning in the networking market. 


Cost Synergies 


In addition to revenue synergies, the acquisition is poised to generate significant cost savings through the  consolidation of operations, optimization of resources, and streamlining of processes. HPE envisions annual  cost synergies of $450 million within three years post-closure, reflecting the potential efficiency gains and  economies of scale arising from the integration of HPE and Juniper's business operations (Novet, 2024). These  cost synergies are expected to materialize across various functional areas, including research and development,  sales and marketing, and general and administrative functions. By rationalizing overlapping activities and  eliminating redundant expenses, HPE aims to improve its operational efficiency, enhance profitability, and  drive margin expansion (Reuters, 2024). Furthermore, the cost synergies derived from the transaction are  expected to contribute positively to HPE's overall financial performance, providing additional resources for  investment in growth initiatives and value creation for shareholders (HPE, 2024). 


Strategic Implications 


Strategically, the acquisition of Juniper Networks aligns with HPE's broader vision of becoming a leader in  AI-driven networking and cloud solutions. By integrating Juniper's advanced networking technologies and  expertise, HPE aims to strengthen its competitive position in key growth areas such as edge computing, AI-driven networking, and secure connectivity (HPE, 2024). The combined entity is poised to offer a  comprehensive portfolio of networking solutions that address the evolving needs of enterprise customers,  enabling them to navigate the complexities of digital transformation with confidence (HPE, 2024). Moreover,  the acquisition underscores HPE's commitment to innovation and customer-centricity, positioning the  company as a trusted partner for organizations seeking to harness the power of technology to drive business  outcomes. 


Risks 


The success of the acquisition hinges on effectively managing various risks and challenges inherent in  integrating two complex organizations. Leadership transitions, cultural differences, and organizational  alignment issues may pose hurdles to seamless integration and collaboration between HPE and Juniper teams.  Moreover, regulatory scrutiny and compliance requirements could impact the deal's timeline and execution,  necessitating proactive engagement with regulatory authorities and stakeholders (Reuters, 2024). Additionally,  market dynamics, competitive pressures, and macroeconomic factors may influence the combined entity's  performance and growth prospects, requiring agility and resilience to navigate uncertainties effectively.


Financial Analysis 


WACC Calculation



Key DCF Valuation Metrics


Intrinsic Value per Share: $47.9

Current Market Price: $37.18

Undervaluation Percentage: 28.96%


Undervaluation: According to the DCF valuation, Juniper Networks' intrinsic value per share is  calculated at $47.9. Given the current market price of $37.18, this indicates that the company is undervalued by approximately 28.96%. This substantial undervaluation supports a prudent acquisition strategy by Hewlett Packard, suggesting that Juniper Networks' stock is trading below its true market potential. Consequently, this offers significant upside potential upon successful integration and realization of synergies. 


Growth Potential: The projected Free Cash Flow to the Firm (FCFF) for Juniper Networks demonstrates a consistent and steady growth trajectory over the forecast period (2023-2033). The FCFF is expected to  grow from $589.8 million in December 2023 to $1,187.3 million by December 2033. This robust growth forecast  indicates Juniper Networks’ strong operational performance and strategic market positioning. For  Hewlett Packard, acquiring a company with positive future cash flow projections would enhance overall  growth prospects and strengthen its market presence in the networking sector. 


Terminal Value Contribution: A significant portion of Juniper Networks' enterprise value is derived  from its terminal value, underscoring the importance of the company's long-term growth and sustainability. The terminal value, calculated using a terminal growth rate of 2.00%, amounts to  $19,944.0 million, with a present value of $9,539.7 million. This highlights that the company's value is not just in its immediate cash flows but also in its enduring potential to generate revenue well into the future. For Hewlett Packard, this indicates a stable and long-lasting addition to its portfolio, enhancing  long- term strategic value. 


Thus, The DCF valuation of Juniper Networks Inc. reveals a notable undervaluation of its stock, strong  growth potential, and substantial terminal value contribution. For Hewlett Packard, these findings support a compelling acquisition case, promising significant strategic and financial benefits. By capitalising on  Juniper Networks' robust operational performance and long-term growth prospects, Hewlett Packard could substantially enhance its market position in the networking sector.


Comparable Company Analysis and Precedent


Comparable Company Analysis



Precedent Transaction Analysis


Conclusion 


Overall, HPE’s, $14 billion all-cash deal, acquisition of Juniper is a significant move within the networking  industry. Not only does this deal narrow the competition with the big players within the industry such as Cisco,  but it also allows for HPE to enter a wide range of markets and industries. 


Our analysis of the synergies shows multiple incentives for the acquisition; firstly, the deal is expected to  generate annual cost synergies of $450 million within the first three years (Novet, 2024), enhancing  operational efficiencies and profitability. The addition of accessing new markets also bolsters revenue  synergies and hence is a highly effective strategic move. Although there are risks within the acquisition such  as the cultural differences and the complexities involved with merging the technologies, overall, we do believe  that this deal is beneficial for both parties due to the potential synergies. This can also be backed up with the  fact that Juniper is undervalued by 28.96%, according to our model, which suggests that the deal will bring  about some heavy upsides to the share price once the revenue and cost synergies are implemented.


References


  1. 1. Fortune Business Insights (n.d.). Enterprise Networking Market. [online] Fortune Business Insights.  Available at: https://www.fortunebusinessinsights.com/enterprise-networking-market-105887.

  2. HPE. (09. January 2024). Press Release. HPE to Acquire Juniper Networks to Accelerate AI Driven  Innovation. Accessed on https://investors.hpe.com/~/media/Files/H/HPEnterprise  IR/documents/hpe-to acquire-juniper-press-release.pdf  

  3. HPE. (2018). Bringing the Cloud Experience to you – with everything as a service. [online]  Available at: https://www.hpe.com/uk/en/about.html

  4. Juniper. Juniper Networks – Global Leader in AI Networking, Cloud, and Connected Security  Solutions. [online] Available at: https://www.juniper.net/

  5. Novet, J. (09. January 2024). CNBC. HPE to acquire Juniper Networks for $14 billion. Accessed on  https://www.cnbc.com/2024/01/09/hpe-to-acquire-juniper-networks-for-14billion.html#:~:text=Hewlett%20Packard%20Enterprise%20said%20it's,company%20said%20in% 20a%20statement.  

  6. Reuters. (10. January 2024). Hewlett Packard Enterprise to buy Juniper Networks in $14 bln deal.  Accessed on https://www.reuters.com/technology/hpe-acquire-juniper-networks-14-bln-deal-2024- 01-09/  

  7. Sherif, A. (2024). IT network infrastructure & equipment - Statistics & Facts. [online] Statista.  Available at: https://www.statista.com/topics/3936/it-networking/#topicOverview [Accessed 11  Jun. 2024].

  8. Shutterstock. (n.d.). Stock Images - Photos, vectors & illustrations for creative projects. [online] Available at: https://www.shutterstock.com/images.

  9. Wikipedia Contributors (2019). Hewlett-Packard. [online] Wikipedia. Available at https://en.wikipedia.org/wiki/Hewlett-Packard.


The opinions expressed in the reports are those of the members of the Junior IB and Scholaride teams and are not affiliated with any university or institution. The financial recommendations provided are for educational purposes only and the Junior IB and Scholaride teams take no responsibility for any losses that may occur from implementing any ideas presented in the reports. The Junior IB and Scholaride teams are not authorized to provide investment advice. The  information, opinions, and estimates presented in the reports reflect the Junior IB and Scholaride teams’ judgment at the time of publication and are subject to change without notice. The price, value, and income of any securities or financial instruments mentioned in the reports may fluctuate. The Junior IB and Scholaride teams have no business relationship with any of the companies mentioned in the reports and do not receive any compensation for their inclusion. 

 

Copyright © June 2024 | The Junior IB | Scholaride 


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