This article was originally published on Real Money on Sept. 21, 2016.
Private equity firms might be drawn to the networking and security hardware vendor's low valuation and blue chip customer list. On the other hand, thanks to a mixture of financial, regulatory and strategic reasons, there might not be many peers willing to consider a bid.
In a recent SEC 8-K filing, Juniper disclosed it has amended its change of control agreement so that the severance payments due to senior executives will now equal 150% and (for CEO Rami Rahim) 200% of their annual base salary and target bonus, rather than 100%. The company also adjusted the definition of a "good reason" for terminating the employment of an executive following a change of control. Shares closed up 5.3% on Wednesday as a result. (For a look at what this means for JNPR in technical terms, sign up for 14-day free trial of TheStreet's premium site Real Money and check out my fellow columnist Gary Morrow's latest charts on the stock.)
With Juniper trading for 10.9 times a consensus 2017 EPS estimate of $2.16, the company's valuation could appeal to PE firms, such as Vista Equity and Thoma Bravo, which have been avidly snapping up enterprise tech companies over the last two years. And while telecom capex swings bring some volatility to Juniper's sales, the company's large installed router base at many Tier-1 global carriers provides a measure of stability.
Also: A PE suitor could see an opportunity to cut costs and unlock value by unloading Juniper's struggling security hardware unit. Thanks to share losses, the unit's sales fell 27% annually in the second quarter to $78.2 million, or 6% of total revenue.
Could a fellow networking equipment firm make a bid? It's possible, but Juniper's size curtails the list of firms who can do it -- the company sports a $9.1 billion valuation following Wednesday's gains, and could seek a sale price north of $11 billion. And a rundown of potential buyers brings up a slew of red flags.
Any bid by router archrival Cisco Systems (CSCO) - Get Report would likely be shot down by antitrust regulators; Cisco and Juniper claim the lion's share of the telecom core router market, and also much of the edge router market, between them. And U.S. regulators can't be expected to agree to any deal with China's Huawei or ZTE.
Mobile infrastructure giant Ericsson (ERIC) - Get Report looked like a potential Juniper suitor a year ago. But the company has since struck a comprehensive reseller deal and technology partnership with Cisco. There's a chanceNokia (NOK) - Get Reportcould bid, but the company is less than a year into the multiyear process of integrating with recently acquired Alcatel-Lucent, and would have to deal with the considerable overlap between Juniper and Alcatel's telecom router lines.
HP Enterprise (HPE) - Get Reportmight be the most intriguing possibility. Meg Whitman's company has strengthened its balance sheet by striking spinoff/merger deals for its slumping software and IT services unit, and has shown a willingness to use M&A to flesh out its hardware product line. And outside of a handful of enterprise switch offerings, HPE and Juniper don't have much product overlap.
But if it turns out HPE isn't interested, whether due to Juniper's asking price or for other reasons, the company better hope the likes Vista and Thoma Bravo consider it an appealing target.