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Juniper And Polycom Merger?

Posted on Thursday, Apr 29th 2010

Earlier in the year, Juniper (NASDAQ:JNPR) and Polycom (NASDAQ:PLCM) formed an alliance to offer videoconferencing systems and associated network infrastructure. Juniper recently announced its plans to buy Ankeena, a media content delivery company, for less than $100 million. Both these moves indicate that Juniper is contemplating how to develop a third front against Cisco. HP’s acquisition of 3Com, of course, has created the most significant threat so far to Cisco’s hegemony. Let’s take a closer look.

According to Bloomberg, Ankeena is Juniper’s first acquisition in five years. The online video trend has been hard to ignore, and this acquisition would beef up Juniper’s prospects. Ankeena’s video streaming software helps to eliminate video jitter or disruptions. Juniper plans to integrate Ankeena’s technology into its Junos software business. In my recent interview with the founder of Juniper, Pradeep Sindhu, he shared his vision of networking technology and its role in society.

Video conferencing is an adjacent market that Juniper is focusing on with its alliance with Polycom. The video conferencing market has seen significant consolidation over the last year. It started with Cisco’s bid for Tandberg in October, which was followed by Logitech’s acquisition of LifeSize for $405 million.

Polycom is reported to be weighing its strategic options, including a sale after talks with two equity firms The Gores Group LLC  and Apax Partners failed. Gores proposed a merger with Siemens and Apax offered $3 billion. I had earlier suggested that HP should acquire Polycom but it chose to go with 3Com to challenge Cisco. And, just yesterday, it decided to acquire Palm. At this rate, HP could also be a buyer for Polycom, but Juniper is also a very reasonable option.

The recent disruption of air travel in Europe highlights how much more dependable and convenient video conferencing is than business travel. According to Wainhouse Research, Polycom and Tandberg dominate the $1.7 billion videoconferencing market with a 35% and 31% share respectively. Cisco finalized its bid for Tandberg at 19 billion Norwegian kroner ($3.3 billion) and is awaiting regulatory approval. But once the deal is integrated, Polycom will face intense competition from the Cisco-Tandberg house. And it would need additional muscle from the likes of HP or Juniper to fight it.

Last week, Juniper reported first quarter revenue of $912.6 million, up 19%. Net income was $163.1 million, or $0.30 per share versus a loss of $4.5 million or $0.01 per share last year. Non-GAAP EPS was $0.27 versus analyst estimates of $0.26 on revenue of $906 million. Gross margin improved to 67.6%, and the company ended the first quarter with nearly $2.8 billion in total cash and investments.  During the quarter, it repurchased shares for about $74 million. Its board of directors approved a new stock repurchase program for up to $1 billion. Q4 analysis is available here.

For the first quarter, Juniper expects revenue of $950 million, plus or minus $20 million, and non-GAAP EPS of $0.27 to $0.29. Analysts expect EPS of $0.28 on revenue of $945 million. The stock is currently trading around $29 with market cap of about $15 billion. It hit a 52-week high of $31.87 on April 7.

Chart forJuniper Networks, Inc. (JNPR)

Polycom reported first quarter revenue of $276 million, up 23% from $225 million last year. Net income was $5 million or $0.06 per share compared to $8 million or $0.10 per share last year. Non-GAAP EPS was $0.29 versus analyst estimates of $0.25 on revenue of $263.3 million. Q4 analysis is available here.

For the second quarter, Polycom expects 4% sequential revenue growth. The stock is currently trading around $32 with market cap of about $2.75 billion. Its 52-week range is $16.26–$34.14.

Chart forPolycom, Inc. (PLCM)

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Interesting viewpoint Sramana. Seems like Polycom would provide Juniper with the biggest ‘entree’ point into the ‘enterprise’ customer that they could capture – often a understated view for Juniper. With video traffic growth driving the expansion of corporate networks, it would seem well for Juniper to own and control what’s expected to be the biggest growth factor in corporate networks over the next 10 years.

Would the combination really be a merger? Seems that Juniper is big enough to buy Polycom, and Polycom shareholders would be satisfied with a payout up front instead of a stock swap or combination with some future payout potential.

Did the Siemens deal really fall thru or was this just an idea?

Scott S Friday, April 30, 2010 at 8:24 AM PT