Juniper to Acquire NetScreen for $4 Billion

UPDATE:By acquiring the security appliance maker for $4 billion in stock, Juniper will position itself to compete with larger security and networking players such as Cisco.

In another sign that the security market—and technology sector in general—is on the rebound, Juniper Networks Inc. on Monday agreed to acquire security appliance maker NetScreen Technologies Inc. for $4 billion in stock.

The purchase price is a premium of more than 50 percent for NetScreens shareholders. The companys stock was trading at $26.40 at the end of trading Friday and had a market capitalization of $3.25 billion. Each NetScreen shareholder will receive 1.4 shares of Juniper stock.

NetScreen is one of the growing number of security appliance makers, and its acquisition by Juniper positions the combined company quite well to compete with larger security and networking players, analysts said.

"Juniper feels like they need a strong security play to compete with Cisco [Systems Inc.], and NetScreen is the obvious choice because their stuff is more network-friendly," said analyst Pete Lindstrom, research director at Spire Security LLC in Malvern Pa. "It makes a lot of sense. NetScreen is an up-and-comer, and this gives them the ability to go toe-to-toe with Cisco."

Juniper officials cited the two companies shared focus on moving and inspecting packets in the interior of networks as the key driver behind the acquisition.

"The packet handling in the middle is exactly the leverage that we have in this combination," said Scott Kriens, chairman and CEO of Juniper, based in Sunnyvale, Calif. "This is an underserved market. Its time to lead, and theres no better way to lead than to match strength with strength."

NetScreen, also of Sunnyvale, will bring 900 employees to Juniper. Kriens added that Juniper may see some cost savings because of the acquisition, but said that wasnt a major factor in the decision to buy NetScreen.

Junipers acquisition of NetScreen marks its biggest foray yet into the enterprise network, believes Frank Dzubeck, president of Communication Network Architects, a Washington-based consulting firm. "Juniper has no presence in the enterprise; NeScreen has channels into the enterprise. Juniper now doesnt have to build an enterprise channel. There is an awful lot of synergy here," he said.

And although Juniper has done a good job of carving out a healthy business in selling into carriers and ISPs, that market does not promise to fuel additional growth.

"They need to get into new markets, and the enterprise is completely virgin for them," said Dzubeck.

Despite the high stock price that Juniper paid for NetScreen, Dzubeck does not believe that Juniper paid too much for NetScreen.

"NetScreen had $400 million in the bank, plus they have a run rate of $200 million plus, and they were doing 70 percent profits. This is a cash generator like youve never seen," he said.

Others believe that selling routers into Ciscos strong hold in the enterprise will be very hard to accomplish.

"They havent focused on the enterprise, their service and support infrastructure is not geared to the enterprise. It will be hard for Juniper to leverage (NetScreens) success and sell into the enterprise," said Lawrence Orans, principal analyst at Gartner Inc., in Stamford, Conn.

"The typical Cisco customer is extremely conservative; theyve had success with Cisco in the past. Theyre not looking for alternatives in the core of their router network," he added.

The one possible motivator for looking at an alternative to Cisco routers would be price, he suggested.

Editors Note: Paula Musich contributed to this story.