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2/13/2004
11:44 AM
William Schaff
William Schaff
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Taking Stock: Juniper Deal Harkens Back To Bubbles Past

The No. 1 rule is to always buy assets with overinflated currency

Who said we can't go back in time? In disclosing the acquisition of NetScreen Technologies, a maker of VPNs and firewalls, the network-equipment company Juniper Networks brought flashbacks of the good old days of the late '90s. When the deal was unveiled, it was valued at a stunning $3.6 billion, based on the previous day's closing price of $29.47 per share of Juniper Networks and the exchange rate of 1.404 shares of Juniper per share of NetScreen. This is a 56% premium over the $26.40 share price of NetScreen before the deal was revealed.

The No. 1 rule for an acquirer in public markets is always try to buy assets with overinflated currency--if you can. Steve Case of America Online knew how to use this strategy in buying Time Warner. During the last technology bubble, mergers and acquisitions were constant and the rationale was that the deals added to earnings per share.

Because Juniper was selling at $27.36 per share last week, the company's equity-market capitalization is $11.3 billion. The trailing 12-month revenue is $701.4 million, and the projected First Call consensus 2005 estimate for earnings per share, ending December, is 49 cents. This places the valuation of Juniper Networks at 53 times 2005 EPS and 16.1 times 12-month sales.

Even after the merger was disclosed, NetScreen had a market capitalization of $3.4 billion, fiscal 2005 (ending September) consensus EPS forecast of 79 cents, and trailing 12-month revenue of $275.3 million. This places NetScreen's val- uation ratios at 45.5 times 2005 EPS and 11.8 times 12-month revenue. Clearly, Juniper is buying a dollar of sales and earnings at a cheaper price than its own sales and earnings.

That's why the deal adds to earnings per share for Juniper. But the real question is why anyone would pay 53 times forward earnings for anything. The company has a projected growth rate of a very solid 20% to 25%. But this price-to-earnings multiple still puts the premium paid for growth at more than 100% as measured by P/E divided by the growth rate.

Strategically, the acquisition may help Juniper compete more effectively with Cisco Systems, which already offers bundled security products with its hardware. Juniper gets some additional channels of distribution that it wasn't in before. It also gets more cross-selling opportunities in some fast-growing segments, such as the government sector.

NetScreen has been gaining market share and was considered a technology leader in security software. The deal is supposed to be a win-win situation strategically, and it may yet be. However, in my opinion, it isn't clear that NetScreen will get much competitive and economic advantage from the merger with Juniper.

But NetScreen shareholders can't complain. They just got paid a 60% premium to sit back and relax. Not a bad time to take a vacation.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.


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To find out more about William Schaff, please visit his page on the Listening Post.

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