Ericsson Not Planning Big M&A Response to Nokia/AlcaLu

Don't expect big M&A from Ericsson in response to Nokia's bid for Alcatel-Lucent. The vendor's CFO says the merger doesn't change its strategy of organic development and small services acquisitions.

Speaking to Light Reading shortly after Ericsson AB (Nasdaq: ERIC)'s first-quarter earnings call, CFO Jan Frykhammar said he believes Nokia Corp. (NYSE: NOK)'s $16.6 billion bid for Alcatel-Lucent (NYSE: ALU) will bring more stability to the vendor market, if it is approved. Many have posited that Ericsson will have to buy up a competitor in response, since the combined Nokia/Alcatel-Lucent will match it in revenues, but Frykhammar says that's not the case. (See Ericsson Sinks on North American Slowdown, Nokia Makes €15.6B Bid for Alcatel-Lucent and Nokia to Claim #2 Carrier Vendor Ranking.)

"For us in terms of strategy, we have been investing and executing on creating a full portfolio targeting IP and cloud for many years. The merger doesn't change our strategy. We are encouraged to continue to execute on that strategy even faster," Frykhammar says.

"Our strategy we have is organic development, and we have also done and continue to do small acquisitions, predominantly in the services space and from time to time in the product space to make sure we close a product gap, but we don't have any other bigger acquisitions in mind," he adds.

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At least one analyst thinks this is the right strategy for Ericsson. Technology Business Research Inc. (TBR) 's Michael Soper called Ericsson one of telecom's most forward-thinking vendors for its focus on capitalizing on the convergence of IT and telecom by directing resources towards cloud, NFV and SDN. While he expects a combined Nokia and Alcatel-Lucent to create a more formidable competitor for Ericsson, he believes the Swedish vendor's focus on professional services and system integration -- something that Alcatel-Lucent and Nokia are both largely addressing through partnerships -- will serve it well. (See Ericsson: Marketing Must Adapt to SDN World and NFV's Looming Battle: Systems Integration.)

"Ericsson realized early that the convergence of IT and CT would necessitate significant investment in professional services and, specifically, systems integration," Toper writes in a research note. "As solutions move more towards open standards, vendors need to add systems integration to their list of core capabilities. Ericsson is ahead of competitors, including Nokia and Alcatel-Lucent, in this area due to years of internal investment and savvy tuck-in acquisitions."

Frykhammar stressed Ericsson's strength in systems integration (SI) as well, noting that the vendor will become a bigger player in OSS/BSS as part of its focus on industry verticals outside of telecom. Any billing system transformation project, whether it contains Ericsson's software or third parties, will need SI help, he says. (See My Ericsson Epiphany and Ericsson Sets Its Sights Outside Telecom.)

"Typically, the decision time for a customer to decide to change, modernize or transform or whatever you want to call these projects takes a long time," he says. "It's a complicated project in the environment of an operator. You take your time to make the decisions. I think it's obviously an important growth enabler for our software business, which is mainly in support solutions but also in services and system integrations."

Frykhammar also sees the spending slowdown in North America only lasting through the second quarter and part of the third, since order lead times are typically a matter of weeks.

He is similarly optimistic about Ericsson's "targeted areas" for sales growth, which include IP networks, cloud-related systems, OSS and BSS, TV and media platforms and a number of selected industry verticals. Revenues from these grew by 10% last year, to roughly 33 billion Swedish kronor ($3.8 billion, at today's exchange rate), and Frykhammar sees no reason why Ericsson cannot better this performance in 2015.

"We will continue to focus on improving the things we can easily control, the cost base, and we'll continue to make sure we do our utmost to stay close to customers and sales," he says. "That will lead to a much better second half of the year for us."

— Sarah Thomas, , Editorial Operations Director, Light Reading