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Swedish vendor makes the case for spending $1.13 billion on Nortel's wireless assets

Ericsson: Why We Want Nortel's Wireless

Michelle Donegan
LR Mobile News Analysis
Michelle Donegan
7/27/2009
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Ericsson today stated the rationale for its $1.13 billion bid for Nortel's North American CDMA business and Long Term Evolution (LTE) assets. (See Ericsson Delivers Knockout Blow to NSN.)

On the day before the joint hearing of the U.S. Bankruptcy Court and Ontario Superior Court of Justice that is scheduled to approve the winning bid for Nortel's wireless assets, CFO and soon-to-be CEO Hans Vestberg expressed confidence in his company's bid and spelled out why the acquisition makes sense to the Swedish vendor. (See Nortel Auction: NSN Bid $1B+.)

Vestberg said the $1.13 billion price tag for Nortel's wireless assets was "relevant and correct and good."

So, what's in it for Ericsson?

In a nutshell, for just over $1 billion, the Swedish vendor gains a cash-generating and profitable (albeit declining) CDMA business, a CDMA customer base, and a better position to win future LTE deals from operators looking to migrate from CDMA to LTE. (See Nortel Wireless Winner: It's Ericsson! and Ericsson Wins Nortel Wireless Auction.)

CDMA business
Even though Vestberg noted the CDMA business was in "gradual" decline, he said the business would generate an operating margin of more than 10 percent this year. Nortel's CDMA business generated revenues of about $2 billion in 2008 and is on track to deliver $1.3 billion in revenues this year. (See Services Save Ericsson in Q2.)

One explanation for being able to achieve this year what Vestberg described as a "robust, double-digit" operating margin is that the 2,100 employees attached to the CDMA business as part of the deal have already been downsized "quite considerably."

"The number of employees is lower than [Nortel] is actually running with," said Vestberg, adding that he did not see the need for redundancies after the deal closes. "The business we're taking over has the relevant resources needed."

Vestberg said he believes the North American CDMA operators will continue to invest in infrastructure for two more years -- after that the business will be primarily maintenance work.

"Even [with] declining growth, it's a good, profitable business. It has a good product mix, including a significant amount of services."

But Vestberg could not specify exactly how much of Nortel's CDMA business was generated from services.

LTE assets
Ericsson says Nortel's LTE assets, which includes 400 engineers, will add to its own R&D efforts in this area and fill a technology gap it didn't already have -- that is, CDMA-to-LTE migration capabilities -- which it needs to keep its flagship LTE customer, Verizon Wireless , happy.

"The migration of CDMA to LTE -- that's an asset we needed to build up anyhow," said Vestberg. "We'll see these resources work with CDMA migration, while our own LTE R&D [focuses on WCDMA migration]. It's a step-increase on our investment in LTE."

What would Ericsson get exactly?
Vestberg did not spell out in any detail what Ericsson was acquiring in terms of products, nor did he name which of the customer accounts were new to Ericsson.

According to bankruptcy court filings, the CDMA products that are part of the deal are the current versions and versions under development of these products: CDMA base transceiver station (BTS), base station controller (BSC) and enhanced BSC, radio network controller, mobile switching center, home location register, media gateway, gateway controller, billing manager, SS7 signaling gateway software, and associated OAM (operations, administration, and maintenance) software systems.

The LTE products associated with the deal, according to the court documents, are the eNodeB (base station), which includes a universal digital module (UDM) and a universal radio module (URM), and associated element management systems.

— Michelle Donegan, European Editor, Unstrung

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