Investors sold Juniper Networks (JNPR) shares on Dec. 20, after news that Ericsson (ERIC) is buying Redback Networks (RBAK) for $1.9 billion. Market players worried that Juniper's CEO Scott G. Kriens will have a tough time battling his now enlarged competition.
Phone and cable networks are upgrading their networks as their customers continue using more media, like television, audio and video, on the Web. In the process, telephone carriers are demanding more technologically sophisticated products like edge routers, which help to deliver services over the Internet. Against this backdrop the Stockholm-based telecom equipment provider Ericsson has just bought Redback, of San Jose, which sells edge routers to telephone carriers and competes against Juniper.
Investors saw trouble for Juniper, whose stock sank 1.6% to $18.95 per share in early afternoon trading on the Nasdaq.
"We now believe upside to the stock (in Juniper) is limited," said CIBC World Markets analyst Ittai Kidron in a research note Dec. 20. Kidron pointed out that the field of competitors in edge routing has now narrowed to Cisco Systmems Inc., Alcatel-Lucent, Ericsson and Juniper. The first three are larger than Juniper and have broader product portfolios, Kidron says. "Strategic risks are mounting."
Kidron downgraded Juniper's stock to sector performer from sector outperformer. The analyst wasn't the only one to grow more pessimistic, either.
"The deal significantly intensifies the competitive environment, given that it will expand Redback's scale and global reach," Standard & Poor's equity analyst Ari Bensinger said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) Making matters worse, Ericsson distributes some of Juniper's products. "We also see the pending acquisition putting Juniper's reseller agreement with Ericsson at risk," Bensinger says.
Juniper counters that its relationship with Ericsson has accounted for less than 10% of its revenue since 2003. "There isn't this huge conflict, as it appears," says spokeswoman Susan Ursch.
As for competitive worries, Ursch says her company will continue to focus on its core competency of providing the best solutions for IP networking and security. "We feel confident we have the right products and partnering strategy to succeed," Ursch says.