Ericsson Offers $2.1B for Redback

Swedish giant offers $2.1B in cash to buy edge router vendor and give it a strong IP convergence story

December 20, 2006

4 Min Read
Ericsson Offers $2.1B for Redback

Ericsson AB (Nasdaq: ERIC) has agreed to a $2.1 billion cash deal worth $25 per share to buy IP router vendor Redback Networks Inc. .

The Swedish firm, which bought British vendor Marconi about a year ago and has only just completed that integration process, says the deal gives it the edge IP router technology it needs to go with its IP-based fixed and wireless access portfolio, and enhances its growth opportunities as carriers shift towards all-IP infrastructures. (See Ericsson Plugs Marconi Progress and Ericsson Buys Bulk of Marconi.)

"With the growing importance of IP-based services, it is key to have our own IP routing technology as a fundamental part of Ericsson's offering," stated the firm's CEO Carl-Henric Svanberg. "This is an acquisition of people and competence," he told an early morning press conference in Stockholm.

It's also one with growth potential. Svanberg used projections from Yankee Group Research Inc. to show that the total addressable market for IP edge routing is expected to exceed $5 billion by 2009, up from $3.6 billion in 2006.

The deal also gives Ericsson a better story in the IPTV infrastructure market, where intelligent edge routers play a critical role in the aggregation, delivery, and management of IP traffic. Svanberg stated at a recent investor conference in Japan that he is keen to make Ericsson a more significant player in the IPTV world. (See HR Sees B-RAS Role Expanding.)

"If we can get this deal together, we are well placed," Svanberg told the press conference. The news, announced Tuesday evening, sent Redback's share price up $3.63, about 17 percent, to $24.80 in after-hours trading. It had closed the day at $21.17.

While news of the deal has come out of the blue, it won't surprise some industry watchers. Back in July, Susquehanna Financial Group analyst Joe Chiasson identified Redback as a leading takeover target and fingered Ericsson as a potential buyer. (See Arris, Redback Top Merger Scorecard.)

Redback, which has about 800 on staff -– about 500 in R&D -- boasts more than 700 customers in 80 countries, including many of the largest Tier 1 operators such as BellSouth Corp. (NYSE: BLS), BT Group plc (NYSE: BT; London: BTA), China Telecom Corp. Ltd. (NYSE: CHA), China Netcom Corp. Ltd. (NYSE: CN; Hong Kong: 0906), Deutsche Telekom AG (NYSE: DT), Orange (NYSE: FTE), KPN Telecom NV (NYSE: KPN), KT Corp. , and Telefónica SA (NYSE: TEF).

(See Redback Touts Deals, China Netcom Deploys Redback, KPN Uses Redback, Lucent, China Netcom Picks Redback, How Redback Won BellSouth, Chunghwa Deploys Redback Gear , and Redback Wins KT Phase 2.)

It is one of the big four players in IP edge routing, along with clear market leader Cisco Systems Inc. (Nasdaq: CSCO) and closer rivals Juniper Networks Inc. (NYSE: JNPR) and Alcatel-Lucent (NYSE: ALU). (See Redback Boasts Ranking.)

Redback has experienced significant sales growth this year, with its revenues up 87 percent in the first nine months of 2006 to $197 million. In the third quarter the vendor met analyst expectations with revenues of $70.9 million, non-GAAP net income of 12 cents a share, and a fourth-quarter revenue forecast of $78 million. (See Avici Down, Redback Less Down and Redback Reports Q3.)

Ericsson expects the deal to close by the end of February 2007 and says it already has the support of 22 percent of Redback shareholders. If the deal goes through, Redback will become a wholly owned subsidiary of the Swedish giant and maintain its offices in San Jose, Calif.

Ericsson believes the deal would be accretive to its earnings from 2008. News of the offer sent Ericsson's stock up by about 1.6 percent to 28 Swedish Kroner on the Stockholm exchange this morning.

While the deal is worth $2.1 billion in total, it is worth $1.9 billion after the deduction of Redback's net cash. Ericsson says the deal offers a 60 percent premium to the average price of Redback stock during the past 90 days, but is a premium of just 18 percent over Tuesday's closing price.

Redback's stock has had a turbulent few months. It was trading at just above $14 in September and around $15 at the beginning of this month, but shot up about 12 percent December 7 on news that business with BellSouth had picked up. Since then it has continued to creep up to yesterday's $21-plus position. (See Redback Climbs on BellSouth News and Redback Gets a Break.)

In August Redback announced that an internal investigation found no evidence of intentional stock backdating, having received a subpoena from the United States Attorney for the Northern District of California and an informal request for information from the Securities and Exchange Commission (SEC) . (See Redback Gets a Boost and Redback in Options Probe.)

— Ray Le Maistre, International News Editor, Light Reading

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