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Ericsson Iraq crisis worsens as risk of US penalties grows

For the world's big kit vendors, the return of a physical Mobile World Congress (MWC) is an opportunity to parade the latest products, meet customers and land deals. But Ericsson's event has been overshadowed by the latest revelations concerning Iraq. The Swedish firm had already acknowledged payments may have gone to Isis, deemed a terrorist organization by US authorities. Now it is in trouble with the US Department of Justice (DoJ) for its failure to make disclosures.

Ericsson's share price has tanked in recent days. Down 13% today in Stockholm at the time of writing, it has sunk to its lowest level since early 2020, when the COVID-19 pandemic first struck. Citibank analysts have warned the firm may become "uninvestable," while others fear the imposition of fines, potential collapse of a $6 billion Vonage takeover and loss of business in US and other markets.

Documents leaked to international media in recent days show that Ericsson may have bribed Isis to move equipment around Iraq and bypass slower routes. The firm also stands accused of putting its contractors in danger as it tried to maintain commercial operations in parts of the country where Isis was active. Some of those contractors were allegedly kidnapped.

Ericsson's share price (SEK)
(Source: Google Finance)
(Source: Google Finance)

Speaking on a call earlier today with analysts and reporters, CEO Börje Ekholm described the affair as a "serious matter that involves embarrassing and unacceptable misconduct in the past." With Ericsson facing criticism that it tried to conceal the affair, he said the number of allegations about wrongdoing has risen from just 145 in 2016 to around 1,000 last year, citing this as evidence new compliance measures are working.

"There are a number of reasons to keep most of them confidential," he said. "Most important is to protect the identity of anyone speaking up. We need to protect identity, or we will not encourage others to speak up. The big worry right now is that this might expose individuals that have spoken up and helped with the investigation."

Breach after breach

But US authorities now consider Ericsson to have breached its deferred prosecution agreement (DPA), struck in December 2019 after revelations of earlier misconduct across numerous countries, by failing to make subsequent disclosures. This week, the DoJ also told the company that earlier disclosures about conduct in Iraq – made before Ericsson paid its $1 billion fine – are deemed "insufficient."

Ekholm could not reassure investors that Ericsson will not face another financial penalty. "We cannot assess that today," he said. "We do not have enough information to provide you with any type of guidance and it would be incorrect to try to do that."

There is growing concern that US actions could threaten Ericsson's $6 billion move for Vonage, a provider of unified communications products. US authorities might seek to block that deal – the biggest announced during Ekholm's tenure – as one of the measures they take. Financing it could also become difficult if Ericsson is fined: It would consume just about all the net cash Ericsson had on its balance sheet at the time it was announced.

"Regarding Vonage, we believe that we can still proceed as before and do not believe or expect it to impact the process," insisted Ekholm when quizzed by equity analysts about the implications. "Of course, given the situation we can never rule out anything."


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He also tried to allay concern that Ericsson's business might suffer in the US and other markets. "The behavior here dates back to a period many years ago," he said. The impact on the business was limited when Ericsson ran afoul of US authorities back in December 2019, he noted. "We also know that when we discuss what we are doing with customers, it helps us."

While that is true, Ericsson's share price did not suffer as badly in 2019 as it has in recent days. One risk is that customers turn to alternative vendors to avoid reputational damage, or even out of concern that financial pain for Ericsson could ultimately affect its competitiveness. A further danger is the potential for investigations by authorities in other parts of the world. "They may decide they want to look into the same matters," said Xavier Dedullen, Ericsson's chief legal officer. "It is a possibility."

The Iraq scandal is undeniably a massive upset for Ekholm, who had previously turned around a business that was struggling before he joined and established it as one of the most competitive 5G vendors in the world. In rooting out misconduct, Ericsson has already fired about 100 people, with 20 resigning voluntarily, and Ekholm says he is determined to create a "speak-up culture" and restore faith in the business. It may be his hardest task yet.

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— Iain Morris, International Editor, Light Reading

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