Funny how some forgotten stocks suddenly becomes popular when an activist hedge-fund manager makes a play. Such is the case with Juniper Networks (JNPR), which yesterday was subject to a takeover proposal by Elliott Management. Elliott, a New York-based hedge fund, just last week bid $3B for Riverbed Technology.
Juniper’s stock, which has languished for the last two years during a roaring bull market, was up 10% on the news. What’s the deal? Does Elliott suddenly want to take over the networking world? Are they going to take on Cisco (CSCO)? Elliott’s greater ambitions aren’t yet clear, but it is clear from Elliott’s presentation that it wants to cut out operating efficiencies, streamline Juniper’s product portfolio, and return more cash to shareholders.
It shouldn’t be too hard. Like many once-high-flying technology companies, over the years Juniper has developed a hardened complacency and arrogance, despite many stumbles in recent years. The most notable of these was QFabric, the much-touted new switching fabric that was first late, and then underwhelming. There was also a big BGP (Border Gateway Protocol) bug, and plenty of missed earnings.
More recently, there has been internal strife with regard to Juniper’s approach to the big new threat on the block, Software Defined Networking (SDN).
I think a combination of these things dinged Juniper’s reputation — and stock price — over the last few years. The stock peaked in the low-40s in early 2011 and has been on the decline ever since then, bouncing below and above $20 until Elliott’s recent offer. This is a catalyst that shareholders have been looking for for a long time, as Juniper’s management has been unwilling to make big changes.
What does the hedge fund propose to do? No surprise — cut operating expenses, first. Elliott believes it can reduce operating expenses by $200 million or more. It also wants to buy back $3.5 billion in stock and pay a dividend of $.50 per share annually (Juniper currently pays no dividend).
These are standard measures out of the hedge-fund activist playbook, but what’s interesting about Elliott’s proposal is that it goes even further. It wants to streamline the products and re-focus Juniper on the service-provider market.
Juniper responded to the proposal yesterday, in a long-winded and somewhat defensive-sounding statement.
“Juniper welcomes open communications with its shareholders and values their input,” said the statement.”Juniper continues to deliver improved financial and operational performance as evidenced by five consecutive quarters of year-over-year revenue growth and our continued efforts to streamline the Company’s cost base.”
The Street responded to Elliott’s proposal positively. Juniper vaulted 20%, from about $22 to just over $25 yesterday, but what’s interesting is that many analysts see more upside in the stock if Elliott’s plan goes through.
Michael Genovese, Managing Director and analyst with MKM Partners, said in a research note this morning that Elliott’s plan has merit.
“We tend to agree with Elliott’s recommendations, particularly in relation to points #1 (reduce opex) and #3 (focus on SP Routing),” wrote Genovese. “We also agree the company should return more cash to shareholders, but would be more conservative here and err on the side of balance sheet strength.”
Genovese says Elliott’s plan has the potential to drive the stock as high as $35-$40, though he puts a more conservative price target of $30 on it. He also expects the company to exceed expectations when it announces its 4Q13 results on January 23.
In this morning’s pre-market, Juniper was up another 2%, trading at $25.80.
Juniper management is likely to put up some resistance to this plan, since it pretty much proposes a gutting of the company and a distribution of most of the cash. But Elliott and the shareholders have an advantage — the stock has been weak, and there is tons of cash on the balance sheet — which shareholders want. Juniper holds about $4B in cash and only $1B in debt, netting out to about $3B in cash on a market capitalization of $12.7B.
It’s clear why Elliott is going fishing in this pond, and this is a long-needed catalyst for change at Juniper networks.
(Disclosure: No position in the stock.)