Was HPE's $14B Juniper acquisition a wise move?

When HPE announced its intention to acquire Juniper Networks for $14 billion in cold, hard cash earlier this month, it was a bit of a shock. Sure, HP had already bought Aruba in 2015 for around $3 billion. Grabbing another networking company would presumably just add another layer to that business. Of course, there are always complications incorporating one large organization into another, and HP doesn’t exactly have the best record for being a smooth operator where that’s concerned over the years.

But surprisingly, the companies didn’t position this conscious coupling as a pure networking play. In fact, in a blog post announcing the deal, Juniper CEO Rami Rahim suggested it was more about AI. “This combination with HPE is expected to enable us to deliver more comprehensive, more competitive, truly end-to-end experience-first AI-native solutions,” he wrote.

Regardless of how you position it, the deal, which pays $40 a share, or a 32% premium over the closing price on January 8 (per CNBC), represented the kind of offer that was hard for Juniper to refuse. Assuming regulators don’t object — not exactly a given these days — this deal could close later this year or early next. They are giving a lot of wiggle room for regulatory oversight.

Since the deal was announced on January 12, HPE investors seem lukewarm about it; that is, if the stock price is any indication of their sentiment. Consider that on January 8, the day the WSJ broke the news that a deal between the two companies was imminent, the stock price sat at $17.72 a share. By January 12, when the deal was officially announced, the price was down to $15.89, and it has been wallowing there ever since, closing Thursday at $15.92, down almost 8% for the month. That’s not exactly a ringing endorsement.

With a couple of weeks in the rearview to digest this deal, we decided to look at just what this was about, and whether investors should maybe be a little more positive about it. As you’ll see, the companies think the numbers look pretty good, and they really do match up well (so long as HPE doesn’t mess it up).

Is it really about AI?

It’s hard to find anything these days in tech that isn’t being positioned with an AI focus, so it shouldn’t come as a surprise that the companies are making AI the centerpiece of this deal. But is that really accurate?

HP thinks it is. “Combining HPE and Juniper’s complementary portfolios supercharges HPE’s edge-to-cloud strategy with an ability to lead in an AI-native environment based on a foundational cloud-native architecture,” the company wrote in a hyperbole-filled statement on the deal.

To be clear, Juniper does have a nice AI component called Marvis, which it acquired when it bought Mist Systems in 2019 for $450 million. According to Forrester Research, in a blog post analyzing the deal, Marvis gives HPE “a two-year lead against its competitors by bringing Juniper into the fold.” That’s a big market advantage and seems like a worthwhile investment, at least on its face.

But Constellation Research analyst Andy Thurai, who both specializes in AI and has “AI” in his name, said that it’s not as clear-cut as all that. In fact, he sees it as more of a pure networking play with an AI component, designed to take on market leader Cisco.

“While HPE sugarcoats this as an AI purchase, the reality is that this allows them to expand into the networking business and establish themselves as a major competitor to Cisco,” Thurai told TechCrunch+.

He says that the combination of Aruba and Juniper will immediately increase the networking segment from 18% of total revenue to 32%. That’s quite a jump. But that’s only the good news. The bad news is that he also sees some overlap between Juniper and Aruba in the wireless/WLAN, SD-WAN and switching businesses, which could offset some of that new marketshare and potentially cause some buyer confusion around products and services.

Patrick Moorhead, founder and principal analyst at Moor Insights & Strategy, says the acquisition gives HPE the tools to compete better with Cisco. “Net-net, I think this is good for networking customers, as it creates a networking entity that can better deliver on networking than as stand-alone companies. Cisco is the 800-pound gorilla in the market, and bigger is better [when it comes to competing with them],” he said.

And while Moorhead acknowledged that HP has had issues with incorporating acquisitions successfully in the past, he thinks that’s mostly in the past. “HP had a pretty bleak track record historically with acquiring large software companies like Autonomy, but that changed radically with HPE’s acquisition of Aruba,” he said. “Aruba represents a massive amount of growth for HPE, and Cray [the super computer company it acquired in 2019 for $1.3 billion] is also showing signs of success.”

Why you gotta be so mad about this deal?

With the above commentary in hand, we’d be forgiven for anticipating investor excitement regarding the deal. After all, if analysts are positive the transaction likely has strategic legs, why has HPE lost value since the deal was announced?

The short answer appears to be opportunity cost. During a public call held by HPE and Juniper after announcing the deal, Bernstein analyst Toni Sacconaghi said that the transaction was “almost like [betting] the ranch in terms of magnitude,” before saying that the agreement was a “surprise” for HPE shareholders, who might have “preferred more capital return rather than an ambitious acquisition.” For an analyst call, those amount to fighting words.

Thankfully for those of us trying to better understand the deal’s logic, and investor sentiment thereof, HPE provided some candid commentary. Antonio Neri, HPE’s CEO, said that after much work, that using its resources to buy Juniper would provide “better return on a long-term [basis] for [its] shareholders.”

Why does he think that’s the case? The pitch is simple: HPE doesn’t get points with investors for sending more cash out, and it really does think that the combination is going to yield a stronger HPE in the long-run.

There is reason to be skeptical of using excess cash for near-term shareholder return efforts. Recall that Microsoft once offered a one-time dividend payout worth about half of its then cash hoard of around $60 billion. That was back in 2004, when the company was under pressure to get its share price moving and better reward shareholders. The result of that massive, one-time dividend payout of $32 billion and $30 billion worth of planned share buybacks? A flat stock price until 2013 or so. In other words, the special dividend did nothing.

HPE can point to a similar saga in its own history. Since splitting with its sister HP, HPE’s value is flat compared to its price level set in February of 2018; indeed, it has traded in a narrow band since then, apart from a period at the start of the COVID pandemic.

This means that HPE could use its cash to reward investors who have not bid its shares higher in light of ample cash usage on their welfare — a stagnant share price reflects poorly on management — or use its excess resources to execute a big deal that it thinks will bolster its value long-term and thus provide shareholder return by a different mechanism.

If simply handing out candy doesn’t build market cap, what shot does HPE have with Juniper under its wing to advance its worth?

Parsing the company’s deck, shareholder commentary and more, it appears that HPE anticipates several benefits to the Juniper buy. First, some cost savings, though those appear to be modest in the large scheme of the transaction, coming in at $450 million “within 36 months” of the deal’s close. It also anticipates cross-selling between the two companies and a larger total addressable networking market than it enjoys today due to an expanded product line. That additional networking revenue should add to the company’s overall revenue over time.

HPE told investors that the deal will help it generate more (“expected to be accretive to”) non-GAAP earnings per share and free cash flow in its first year after closing. Put another way, the time to value for the HPE-Juniper deal will be quick, at least in the eyes of the two companies’ management teams.

Most importantly, however, HPE claims that the deal will “accelerate long-term revenue growth.” HPE shrank in its most recent quarter, while Juniper posted similarly lackluster growth. Perhaps the two companies can grow more quickly as a pair, but it appears that the accelerated growth that HPE anticipates will not come from merely bolting on a quickly expanding company to its existing business.

That fact, combined with the deal’s expense — debt is not as cheap as it once was — and you can understand investor anxiety. But what is the role of a CEO other than to make hard calls regarding where to deploy resources? It’s easy to take a bunch of cash and throw it in the air. It’s harder to put those same funds to work in a massive deal, like what the enterprise tech giant is planning!

Investors on the public markets are famously impatient. HPE is demanding patience to do something hard. If the gamble pays off in time, we’ll see it in the data. But from where we sit, if you want dividends, buy oil stocks. Tech companies should be constantly working to rebuild themselves or face accidental obsolescence.