This week it was reported that Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) was considering buying Juniper Networks, Inc. (NYSE:JNPR) The idea was that the Finnish company would be able to merge Juniper into its telecommunications network hardware division. But would such a deal make sense? Nokia is in the process of unloading its handset division to Microsoft Corporation (NASDAQ:MSFT), so it might be looking for the next piece of the puzzle.

Nokia Corporation

Why Juniper would be good for Nokia

UBS analyst Gareth Jenkins and his team see two main reasons that a deal between Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) and Juniper Networks, Inc. (NYSE:JNPR) might make sense. First, they said this would fill a gap in Nokia’s product line, which currently lacks an edge / core IP router solution. Currently Nokia focuses more on EPC for mobile networks. The UBS team estimates that if Nokia would decide to fill that gap on its own, it would take about three to five years to research and develop the product, plus $1.2 billion in spending each year without a guarantee of success.

Second, they said the acquisition of Juniper Networks, Inc. (NBYSE:JNPR) would add scale to Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) after it sells its devices division. As a result of a larger scale, Nokia itself may avoid becoming an acquisition target as well.

What about the mechanics?

The UBS team also considers what it would take to get a deal done between the two companies. They said it would require equity financing, a joint venture or a tie-up. The analysts start by noting that Juniper Networks, Inc. (NYSE:JNPR) has a market capitalization of around €10 billion. If Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) paid a 20% to 30% acquisition premium, and taking into account Juniper’s cash position, Nokia would have to finance about €9.5 billion to €10.5 billion.

After the deal with Microsoft Corporation (NASDAQ:MSFT), they estimate that Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) will have about €8 billion in net cash. Assuming Nokia wants to keep €2.5 billion in net cash, this would require more than €4 billion in equity financing. Because of the “low-levels cash interest” and the fact that Juniper Networks, Inc. (NYSE:JNPR) has EBIT margins of less than 20%, they believe it would be accretive to earnings.

They see equity financing as being a less likely scenario and a joint venture or tie-up like the one between Ericsson and Ciena as being more likely if Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) does enter into some sort of agreement with Juniper Networks, Inc. (NYSE:JNPR).