What a Combined EMC and Juniper Networks Would Look Like

You have seen massive broadening out by the large technology and communications equipment makers. It has been happening over and over, and we wanted to address the rumors that Juniper Networks Inc. (NYSE: JNPR) potentially will be acquired by EMC Corp. (NYSE: EMC). Juniper shares are substantially higher and EMC shares opened marginally higher and have slid after the open. In short, Wall St. is trying to figure this one out.

Our interest is in what a combined EMC-Juniper would look like. EMC is the defacto global storage leader and Juniper is a high-end networking equipment maker. Due to data center and networking migration, there are some overlaps in the businesses. Still, there also would be many new opportunities, and this would represent a strong rival to Cisco Systems Inc. (NASDAQ: CSCO) as Cisco is looking for more data center business.

Then there is virtualization to be considered here. EMC owns the supermajority stake in the top virtualization player VMware Inc. (NYSE: VMW). This implied tie up might really be considered a three-way deal rather a simple merger, although we do not believe that EMC plans to take VMware entirely back under the roof after it unlocked the value by creating a tracking stock.

Juniper generated $4.45 billion in 2011 sales, but that is expected to be down almost 3% to $4.33 billion in 2012 and rebounding to more than $4.6 billion in 2013. EMC generated $20.01 billion in sales in 2011 and that is expected to be $22.2 billion in 2012 and $24.75 billion in 2013.

If EMC can keep 90% of the combined sales and then get Juniper's growth back on track, competing against Cisco more and more, then EMC would have a chance that it would be generating a run-rate for $30 billion per year in revenues.

Where this deal gets a bit complicated on the virtualization side is that Cisco and VMware do work together. VMware took the arms dealer approach, where it sells to everyone so that it has a lead in virtualization. This is just one reason that we would expect some transitioning in the revenue absorption that is often seen when two companies merge. For that matter, Cisco Systems still has a substantial ownership stake in VMware.

EMC has a market cap of $53 billion and Juniper has a market cap of about $9.5 billion. This combination would theoretically move the company up to a $60 billion company, but that would depend on whether the deal was cash, stock, or a combination. EMC can easily afford the purchase if it is willing to pay up for a business like Juniper that is not growing at its top potential. EMC is also a poor capital allocator, as it has yet to pay a dividend despite sitting on billions in cash and having no significant long-term debt.

Juniper recently announced around 500 layoffs and its headcount may dip to just under 9,000 on its own now. EMC has more than 53,000 employees as of last look. The combined entity may have closer to 60,000 employees after "transitioning" if it pursues this merger.

With Cisco competing for more and more "total technology spend" opportunities and with Hewlett-Packard Co. (NYSE: HPQ) in such disarray and with a stronger Cisco competitor, EMC might be feeling the pressure to leverage up a bit in this case. It seems like it would be a larger deal and it might stretch EMC a bit thin. Still, this move might also secure EMC's dominance for at least another decade.

As with most merger reports, we would consider this a rumor until one of the companies involved formally comments on the deal.

Juniper is up about 5% in morning trading to $18.18, in a 52-week range of $14.01 to $25.61. EMC is down about 1% in morning trading to $25.35, in a 52-week range of $21.25 to $30.00. And Cisco is down about 0.5% in morning trading to $18.60, in a 52-week range of $14.96 to $21.30.