Before the market opened today (June 26), Extreme Networks announced its intent to acquire Aerohive Networks. Extreme is paying a purchase price of $4.45 per share in cash, which represents about a 40% premium on the opening stock price. This equates to a total price of about $272 million, but Aerohive has about $62 million in cash, making the total enterprise value $210 million.
This seems like an outstanding price for a company projected to do $153 million in revenue in 2019 and has gross margins that are in the low- to mid-60% range, which is accretive to Extreme’s margins. The combined revenue of Extreme plus Aerohive is greater than $1.1 billion, making Extreme the solid No. 3 enterprise network vendor.
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This continues Extreme’s efforts to consolidate the network industry. In 2013, a nearly dead Extreme made its first acquisition when it snapped up Enterasys Networks, but that was just the beginning. Since 2016, Extreme has been on a buying spree; the company bought the WiFi business from Zebra, the networking division from Avaya and the data center group from Brocade.
Each of these can be considered value acquisitions where the business being acquired had unique assets but had some kind of problem. Extreme saw it could bring those groups into its fold and accelerate growth. For example, Avaya had a number of innovative network products but was a networking group stuck inside a unified communications-first company, so it never managed to scale the business to its full potential. Extreme is the industry’s largest network pure-play vendor, and inside Extreme, the Avaya business has benefited from its scale and integrated channel strategy.
The one difference between previous acquisitions and Aerohive is that Avaya, Zebra and Brocade were used to create scale, where Aerohive will enable Extreme to grow as it moves into new markets and brings a different revenue model to the company. The majority of Aerohive’s revenue is cloud-based and recurring, which has a dramatically different valuation from Wall Street.
Aerohive fits the model as well, because it has some innovative products but has struggled to maintain sales momentum. It was a pioneer in controllerless WiFi and has one of the best cloud management portals in the networking industry, because it balances ease of use with advanced capabilities. Most cloud management tools are feature-rich and complicated to use but don’t enable the engineer to perform advanced functions. Aerohive lets administrators start simple but then go deep technically if necessary.
A proof point of this is that the 650 Group market research team tagged Aerohive as being the second-largest cloud networking vendor. A couple of years ago, Aerohive went through the process of rearchitecting its cloud to be a cloud-native microservices platform, making it highly agile.
Its problem has never been product but rather sales execution. Five years ago, it made a huge bet on K-12 education and the massive amount of money that was supposed to hit that industry from E-Rate reform. E-Rate is an FCC program that helps schools and libraries obtain affordable broadband. Unfortunately, the entire E-Rate program has been a disaster, and the pot of gold that was supposed to be at the end of the K-12 rainbow never materialized. This has kept the company treading water ever since. Extreme’s management team, led by CEO Ed Meyecord and Chief Marketing, Development and Product Operations Officer Norman Rice, is an execution machine and should be able to fix many of the issues that held it back.
Another issue for Aerohive is its relatively small size compared with Cisco Systems, HPE, Juniper and others. The heft, size and scale that Extreme brings will alleviate the fear of doing business with a small company. In networking, size matters, which is why the roll-up of small companies that Extreme has added has helped it move into the leaders’ quadrant of Gartner’s Magic Quadrant.
In addition to the cloud portal, Aerohive has done extensive work in the area of artificial intelligence and has prebuilt analytic applications for both retailers and schools. The AI investment made by Aerohive should be an excellent complement to Extreme’s Elemental autonomous networking solution.
Another interesting wireless product from Aerohive is its Atom AP30 access point that plugs into a wall outlet and then joins the network via mesh technology. This enables WiFi networks to be extended quickly without having to run wires. This is ideally suited to hotels, dorm rooms, classrooms and carpeted offices, where there is a desire to quickly expand the WiFi network without having to break the bank.
Lastly, Aerohive brings a cloud-based network access control (NAC) solution to Extreme to complement its on-premises-based ExtremeControl product. Customers will now have the choice of either deployment model or doing some sort of hybrid configuration, where the cloud-based system is used in branch offices and on-premises is used in the larger offices.
Aerohive’s heritage is WiFi, but its portfolio is much broader. It has a strong SD-WAN solution, which fills a product gap for Extreme. Through all of its acquisitions, Extreme has brought together a wide range of technologies, but never SD-WAN. It’s fair to say that Extreme is late to the SD-WAN party, but it is catching the market at the right time as it transitions from SD-WAN to SD-Branch. This is what businesses are considering—not just WAN connectivity but also to make the in-branch LAN part of the deployment. Aerohive hasn’t used the term “SD-Branch” specifically, but its SD-WAN and SD-LAN and the ability to map policies across both using cloud NAC meet the criteria.
The proposed acquisition of Aerohive by Extreme is a win-win for customers of both companies because the combined portfolio can provide a complete solution—from the branch to the campus and the data center all managed through a best-in-class, cloud-native management tool.
Zeus Kerravala is an eWEEK regular contributor and the founder and principal analyst with ZK Research. He spent 10 years at Yankee Group and prior to that held a number of corporate IT positions.