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Ericsson May Jettison Troubled Units

Sources say Ericsson AB (Nasdaq: ERICY) is mulling the sale of one or more of its divisions, including the one devoted to optical fiber.

On the block may be the three units of Ericsson that comprise about 11.1 percent of its revenues:

  • Ericsson Network Technologies, which specializes in fiber optic cabling and telecom network installation and integration and is based chiefly in Sweden.
  • Ericsson Microelectronics, which makes integrated circuits and subassemblies for wireless and wireline devices, including switches, routers, and wireless base stations. This division has manufacturing facilities in Sweden, the U.S., and China, and maintains design groups in Sweden, Norway, and several U.S. cities, including Phoenix and Morgan Hill, Calif.
  • Ericsson Enterprise Solutions, which makes data and voice-over-IP gear and equipment for call centers and IT departments in private networks. This unit has key offices in Belgium and Luxembourg.

Sources are silent about which of these divisions may be put up for sale, when it might happen, and who the potential takers might be.

But it's plain to see why these units have fallen prey to so much speculation. Taken together, these are the properties that are responsible for the least amount of Ericsson's revenues -- and much of its present financial woes.

Of the 210.8 billion Swedish krona (US$20 billion) posted in sales for the twelve months ended January 25, 2002, Ericsson reports that about SEK33.4 billion ($3.2 billion) came from these so-called "other operations," as opposed to sales of the company's mainstay wireless infrastructure gear, such as base-station equipment for cellular networks.

But the operating margin for these properties appears to be dragging down the company's financials: In its January 25, 2002, quarterly report, Ericsson shows a -27 percent operating margin for these "other operations," compared with a -1 percent margin for its systems (wireless infrastructure) business.

Analysts say there would be no surprise in the sale of any of these operations, since they aren't germane to Ericsson's business but seem to be dragging it down. "They will likely sell something," says Casey Ryan of Wells Fargo Securities LLC.

Significantly, Ryan says operating margins -- the very items where the units cited above are performing so poorly -- are a big problem for Ericsson. He says Ericsson's operating expenses are too high, and he doesn't see how they'll allow Ericsson to meet its 2002 goal of having a 5 percent operating margin.

Behind the poor margins are high expenses, indicating the need for further cuts or asset sales, Ryan says. Indeed, high expenses is a key reason he and his colleagues cut their estimates of Ericsson's total 2002 revenues on April 1, four days after Ericsson's general company meeting, by 10.1 percent. Wells Fargo initially predicted that Ericsson would report about SEK218.8 billion ($21.1 billion) in revenues for 2002. Now it's targeting about SEK196.8 billion ($19 billion). The new figure translates to a loss of $0.09 per share, the firm says.

All this aside, the possibility that Ericsson will sell any of its divisions remains a rumor. And rumors about Ericsson are nothing new. Indeed, analysts acknowledge that the firm's particular set of financial "givens," as noted above, has made it a target for M&A speculation in recent months. Helping ignite the rumor mill is that stateside investors often have difficulty figuring out what's going on with companies halfway around the world. In the absence of light, things grow in darkness.

Ericsson itself isn't much help. When asked about the possibility that its Network Technologies unit may be sold, a spokesperson had only this to say: "We know there have been many rumors flying around, but there's nothing we think needs commenting on."

The company's stance isn't always so bland. It's taken aim at several recent speculative articles in the press. On March 28, for instance, Ericsson issued a public statement denying rumors in the Swedish press that there would be another 25,000 layoffs (the company eliminated 20 percent of its workforce in 2001 and now has roughly 85,000 workers worldwide).

On March 21, Ericsson issued a statement denying that it had issued guidance to a financial analyst, as report in a Dow Jones Newswire story. On February 19, it took aim at a number of "incorrect statements" in a Swedish financial weekly.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com
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