Analysts Doubt Ericsson/UTStarcom Deal
Ericsson CEO Carl-Henric Svanberg reportedly said Friday in South China's Guangzhou city that his company is engaged in talks to acquire a Chinese company. He wouldn’t name names.
The Shanghai Daily News Monday identified UTStarcom as one of two companies in consideration, the other being Harbour Networks Co. Ltd.
Ericsson has expressed an interest in moving deeper into the network infrastructure business in China. And UTStarcom might welcome an Ericsson overture. Though based in the U.S., its cash cow has been the handset and infrastructure market for low-cost Personal Access System (PAS) wireless service in China. But the cow hasn't been at all well lately, and UTStarcom is struggling to find a replacement. (See UTStarcom Pumps Up PAS and UTStarcom Cuts Outlook, Shares Dive .)
Western analysts contacted by Light Reading don't think the Ericsson theory has legs, though. “I don’t know how much credibility to put into that,” American Technology Research analyst Albert Lin said Monday.
Business culture would be one barrier, as Lin says UTStarcom's PAS business was characterized by vendor financing arrangements and unpredictable revenues. “The last time I talked to the Ericsson guys, they said the biggest problem is not UTStarcom’s technology," he says. "The biggest problem is: How do you integrate what they used to do [the PAS business]?
"Ericsson got out of the handset business because the revenues were so unpredictable from quarter to quarter. They liked the predictability of infrastructure sales." Pacific Growth Equities Inc. analyst Joe Noel offers another reason an UTStarcom acquisition might not fly in the near term: an ongoing SEC investigation. (See UTStarcom Stung by Softbank.)
“It’s not very likely that a big, reliable company like Ericsson would go after a company that has an investigation like that going on,” Noel says.
Noel says UTStarcom hasn’t really said what the investigation is about, but he believes the SEC is looking into the company’s revenue recognition practices.
If Ericsson did move to acquire UTStarcom, the analysts agree, it would do so for the company’s IPTV platform, which has surprised some observers by being chosen over competing technology from companies like (NYSE: ALA; Paris: CGEP:PA). (See UTStarcom Sells IPTV to China and UTStarcom Wins (Again) at Softbank BB.)
Ericsson officials "are not interested in the PAS business," Noel says. Lin says IP video may be a way for Ericsson to hedge against the eventual decay of its successful wireless business in Asia: “UMTS sales were growing so well, but they are looking at slowing growth for that in the future. They may want to lower their dependence on that and get more involved with wireline infrastructure. That’s part of why they want to get involved with IP video."
UTStarcom spokeswoman Chesha Kamieniecki gave Light Reading the obligatory “we don’t comment on rumors” brush-off. UTStarcom stock did not react noticeably to the speculation in trading Monday or Tuesday. (See UTStarcom Unloads Q3 Warning.)
Asian analysts say Harbour may have the better chance of being acquired by Ericsson because it is more focused on infrastructure. The company sells routers and switches -- including medium- and low-end Ethernet switches -- and has been hurt by extreme pricing pressure from its rival Huawei Technologies Co. Ltd. (See Telecom's China Syndrome.) Ericsson rival Siemens AG (NYSE: SI; Frankfurt: SIE) also had a place in yesterday’s rumor mill. The German company has said it wants to increase its R&D presence in China and may look to M&A to do so. The Shanghai Daily News account notes that Harbour offered itself up for sale to Siemens earlier this year, but nothing came of it.
— Mark Sullivan, Reporter, Light Reading