Ericsson Delivers Knockout Blow to NSN

Ericsson AB (Nasdaq: ERIC) landed a $1.13 billion sucker-punch late Friday that left the North American aspirations of key rival Nokia Siemens Networks (NSN) flat out on the canvas.

Following its late entry into the auction for Nortel Networks Ltd. 's CDMA and Long Term Evolution (LTE) access assets, Ericsson outbid NSN and private equity firm MatlinPatterson Global Advisers with its $1.13 billion cash offer, and is now just waiting for bankruptcy court and regulatory approval to close the deal. (See Nortel Wireless Winner: It's Ericsson!, Ericsson Wins Nortel Wireless Auction, and Auction Day for Nortel.)

NSN exuded confidence prior to the auction, which it initiated with its $650 million offer for Nortel's assets. (See NSN Picks at Nortel's Mobile Bones .)

But it was left staggering and bloodied by Ericsson's knockout blow, which leaves the giant Swedish vendor as an even stronger player in North America, where it has just won a major outsourcing deal with Sprint Nextel Corp. (NYSE: S). (See Ericsson, Sprint in $5B Managed Services Deal.)

Ericsson says the combination of the Sprint deal (which involves the transfer of about 6,000 staff to the vendor) and the Nortel assets acquisition (which includes about 2,500 Nortel staff) will make North America its largest region, with about 14,000 employees. During the second quarter of this year, the region generated 11.3 percent of Ericsson's revenues. (See Services Save Ericsson in Q2.)

Ericsson notes that Nortel's CDMA business includes "important CDMA contracts with North American operators," including Sprint, Verizon Wireless , U.S. Cellular Corp. , BCE Inc. (Bell Canada) (NYSE/Toronto: BCE), and Leap Wireless International Inc. (Nasdaq: LEAP).

It also notes that the business generated sales of about $2 billion in 2008 and was profitable. Sales have been shrinking, however, and the business is on course for 2009 revenues of around $1.3 billion. Ericsson says it expects the deal to have "a positive effect on Ericsson's earnings within a year after closing." Its current head of Northern Europe, Magnus Mandersson, will be appointed President of Ericsson CDMA operations, assisted by Nortel's current president of Carrier Networks, Richard Lowe, who will be chief operating officer. (See Richard Lowe, President of Carrier Networks, Nortel.)

The deal isn't just about Nortel's current CDMA business, though. Like NSN, Ericsson views Nortel's CDMA customers as prime candidates for migration to LTE. "The acquisition significantly expands Ericsson's footprint in North America, particularly as this region is emerging as an early adopter of LTE technology," states the Swedish vendor.

Heavy Reading senior analyst Patrick Donegan believes Ericsson's decision to outbid NSN was driven by its determination to be the leading LTE vendor.

"This is a 'take no prisoners' move by Ericsson. It's already in a very strong position for LTE in North America, and globally, and would have still been in a very strong position even without the Nortel assets," says Donegan. "Ericsson obviously decided it was worth $1.1 billion just to take absolutely no chances at all with that leadership position."

And in the process, of course, it has derailed NSN's growth strategy. (See The Spoilers of War.)

NSN: patched up, fighting on
With the Ericsson team still popping champagne corks and blowing raspberries at the defeated Finnish/German team (we imagine...), NSN issued a statement saying it "remains focused on maintaining its leadership in the global wireless infrastructure industry and sustaining its recent momentum in the North American market." (See Nokia Siemens Responds to Nortel Auction.)

And in an apparent effort to mask the company's disappointment, NSN's chief markets operations officer Bosco Novak stated: "Our final offer for Nortel’s assets represented a fair price, and we did not enter this process with a win-at-any-cost mindset… Ours was an opportunistic bid aimed at supporting the great progress we’ve made in North America in the past 18 months, and we are very confident that momentum will continue to grow."

That momentum, noted NSN, includes a recent 3G deal with Canadian mobile startup Globalive Wireless to add to its current Canadian mobile infrastructure engagements with Bell Canada, Videotron, and Telus Corp. (NYSE: TU; Toronto: T). (See NSN Wins 3G Deal, Videotron Builds HSPA Network, NSN's Latest LTE Moves, and Canadians Leap to LTE.)

In the U.S. it has recently landed deals to provide Verizon Wireless and Time Warner Cable Inc. (NYSE: TWC) with IP Multimedia Subsystem (IMS) solutions. (See MWC 2009: Verizon Picks LTE Vendors and TWC Uses NSN for IMS.)

But NSN really wanted Nortel's wireless assets to pump up its North American business, which generated just 6.5 percent of its revenues in the second quarter of this year, as well as to provide greater LTE migration prospects. (See Slump Slams Nokia Siemens .)

It seems clear that NSN, which has been very conscious of its cost base during its post-merger process, didn't have the financial firepower to match Ericsson: The Swedish vendor may be starting to feel the pinch of the global recession, but it's still profitable and posting quarterly revenues of $7 billion; and at the end of June it had 27.9 billion Swedish Kronor ($3.8 billion) in net cash. NSN, meanwhile, reported second-quarter revenues of $4.5 billion and an operating loss of €188 million ($269 million).

So what's next for NSN? Might it turn its attentions to other Nortel assets -- say, the Metro Ethernet networks (MEN) division that also has some attractive North American accounts and some well regarded optical technology? (See Who's Waving Their Wad at Nortel’s MEN?)

NSN is not believed to be planning any further bids.

In addition, it's not clear currently whether the companies that took part in Friday's auction are able to participate in further bids for particular Nortel assets. Research In Motion Ltd. (RIM) (Nasdaq: RIMM; Toronto: RIM) last week claimed it was told it would qualify for last week's auction "only if it promised not to submit offers for other Nortel assets for a period of one year." (See RIM Blames Nortel.)

It's unclear, however, whether NSN, Ericsson, and MatlinPatterson were also bound by such a restriction, or whether the timescale specified by RIM is its own interpretation of its negotiations with Nortel.

According to Nortel, under the terms of a legal instrument known as a "standstill provision," any bids for its assets require Nortel's consent, which, of course, it might decline to provide. It seems RIM may have been advised it would not gain Nortel's consent for further bids if it took part in last week's auction.

It's also possible that NSN, Ericsson, and MatlinPatterson may also have engaged in "consent" agreements with Nortel prior to last week's auction. Nortel, however, isn't prepared to discuss individual cases.

— Ray Le Maistre, International News Editor, Light Reading