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Extreme's Aerohive acquisition closes WLAN product gap

Extreme Networks' Aerohive acquisition would fill a gap in Extreme's WLAN portfolio by adding a cloud-based management option competitive with Cisco and Aruba.

Extreme Networks plans to acquire Aerohive for $272 million in cash, a move that plugs a significant hole in Extreme's wireless LAN portfolio and sets up the company to compete head-to-head with Aruba, a Hewlett Packard Enterprise company, and Cisco's Meraki business.

Extreme announced the Aerohive acquisition this week, saying the company's cloud-managed Wi-Fi and network access control technologies were particularly attractive. Extreme has the on-premises edge-to-core infrastructure for the WLAN, but doesn't have the cloud technology needed to compete with offerings from Meraki and Aruba.

Also, Aerohive has a footprint in several markets where Extreme is absent, such as retail banking, long-term care, quick-service restaurants, colleges and K-12 schools, Extreme CEO Ed Meyercord said during a conference call with investors. Aerohive has 30,000 customers, and Extreme expects to absorb 24,000 of them.

Technology analysts agreed Extreme couldn't compete effectively in the WLAN market in the long term unless it had an offering like Aerohive's. Roughly a quarter of global WLAN revenue comes from cloud-managed products, according to IDC, which expects that number to grow to 40% by 2023.

Also, Aerohive brings products based on Wi-Fi 6, the next-generation wireless technology for mobile and IoT devices, and a controller-less Wi-Fi architecture that analysts consider a market differentiator. Rather than use a central controller to perform critical tasks on a wireless network, Aerohive has built software into its access points that lets them complete those tasks collectively.

"This is bigger than a customer acquisition deal," said Shamus McGillicuddy, an analyst with Enterprise Management Associates, based in Boulder, Colo. "Extreme gets a real Wi-Fi business."

Aerohive's business struggles

Recently, however, Aerohive has had trouble on the sales side of its operation. In May, the company reported its losses grew in the quarter ended March 31, and revenue fell roughly 8%. At the time, Aerohive CEO David Flynn promised investors the company would "improve execution."

The disappointing quarterly results and a thorough examination of the WLAN market contributed to Aerohive's decision to join Extreme, Flynn said during the joint investor call with Meyercord.

This is bigger than a customer acquisition deal. Extreme gets a real Wi-Fi business.
Shamus McGillicuddyAnalyst at Enterprise Management Associates

"This was an attractive path for the company," Flynn said.

Extreme agreed to pay $4.45 per share of Aerohive stock, which represented a 40% premium and an aggregated price of $272 million. However, Extreme has valued the deal at $210 million by subtracting Aerohive's $62 million net cash balance. Extreme expects to close the transaction in the third quarter.

Even at $272 million, Extreme appears to have gotten a bargain. In March, Juniper Networks agreed to pay $405 million for cloud-managed Wi-Fi startup Mist Systems.  

Over the last three years, Extreme has made three asset purchases that include Zebra Technologies' on-premises WLAN business, Avaya's networking operation and Brocade's data center operation.

Extreme SD-WAN plans following Aerohive acquisition

Despite all the acquisitions, Extreme still lacks an enterprise-class software-defined WAN product, which is one of the hottest technologies in campus and branch office networking. Aerohive has an SD-WAN product for connecting the WLAN to the data center and cloud or SaaS applications, but analysts consider it midmarket technology that cannot compete with offerings from Cisco.

"Aerohive's SD-WAN isn't as fully featured as some of the other vendors in the SD-WAN space," said Brandon Butler, an analyst at IDC.

Extreme recognizes the market demand for SD-WAN and is weighing the options of developing or acquiring the technology or partnering with SD-WAN vendors. For now, Aerohive's SD-WAN is sufficient for its customers and some of Extreme's, said Norman Rice, Extreme’s chief marketing, development and product operations officer.

To date, a significant portion of Extreme's revenue growth has come from its acquisitions. However, the company's long-term success will depend on whether it can develop and sell new products that incorporate the acquired technology.

Extreme has started an 18-month overhaul of 70% of its product portfolio. A lot of the work involves switching, but a portion covers the updating of products to support Wi-Fi 6.

"Extreme definitely needs to execute," McGillicuddy said. "It needs to protect and expand Aerohive's market share, and it needs to consolidate its product portfolio more so that buyers know exactly what the future of Extreme is."

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