Vice President: Aaron Cohen
Analysts: Arnav Aggarwal, Aman Gogna, Fynn Hirrlinger, Kostadin Iliev, Shreyansh Jain (Scholaride), Himanshu Mittal (Scholaride), Benedict Walton-McBain
Report by: Aastha Gupta, Samanvi Jain
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. Fortune Business Insights (n.d.). Enterprise Networking Market. [online] Fortune Business Insights. Available at: https://www.fortunebusinessinsights.com/enterprise-networking-market-105887.
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
HPE. (2018). Bringing the Cloud Experience to you – with everything as a service. [online] Available at: https://www.hpe.com/uk/en/about.html.
Juniper. Juniper Networks – Global Leader in AI Networking, Cloud, and Connected Security Solutions. [online] Available at: https://www.juniper.net/.
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.
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/
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].
Shutterstock. (n.d.). Stock Images - Photos, vectors & illustrations for creative projects. [online] Available at: https://www.shutterstock.com/images.
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.
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