HPE Stock Soars as Juniper Merger Gets Regulatory Approval. There’s Just 1 Catch.

In buying Juniper, Hewlett Packard Enterprise is attempting to create a new networking powerhouse capable of competing in the fast-growing data center segment, where Cisco and Nvidia dominate. (Dreamstime)

Hewlett Packard Enterprise overcame a major hurdle in its acquisition of Juniper Networks on Saturday, signing a consent decree with the U.S. Department of Justice. The agreement gives the companies a key government sign-off in moving forward with their merger.

The deal is an attempt to create a new networking powerhouse capable of competing in the fast-growing data center segment, where Cisco Systems and Nvidia dominate.

Investors were cheering the news Monday, with HPE shares up 12.6%, making it the day’s best performing stock in the S&P 500. Juniper’s stock is up 8.4% in midday trading on Monday, to $39.90 just below the $40 sale price.

HPE’s strategic rationale for the deal is threefold. It wants to catch up to Cisco who lead in multiple segments of the networking market, most notably in the data center where new AI workloads demand high-speed connections. Juniper brings a better network switch than HPE’s, one that competes more favorably with Cisco’s offerings.

“This new alternative to legacy incumbent networking solutions positively changes the competitive dynamics in the networking market and provides customers with greater innovation, choice and faster time to value,” the company said in a press release.

Second, Juniper has a foundation of contracts with telecom companies like AT&T, as well as cloud providers like Amazon.com’s AWS. Besides the revenue, these are important customer relationships, which will now be in HPE’s portfolio.

But Juniper’s Mist AI platform may be the most important prize that HPE is pursuing. Mist AI can act like a junior network engineer, fixing common issues without elevating them to a person. HPE has a similar product, but Mist AI is considered the industry leader.

There is a catch in the consent decree, and one that could complicate the eventual success of the merger. According to the agreed upon terms, HPE, within 180 days, will be required to hold an auction to sell a perpetual license for the Mist AI source code to a competitor who is approved by the Justice Department. At first, this won’t provide much competition to the new HPE, which will have the advantage of tight integration with its networking hardware. But over time, the required licensing deal could develop into a threat to the Mist AI moat.

The full consent decree will be published in the Federal Register this week, after which there is a 60-day comment period. The merger could then close as soon as early September.

Write to Adam Levine at adam.levine@barrons.com