Ericsson's Riverstone Hangover

A lot can happen in a week: On Friday, March 17, the market was surprised when Ericsson AB (Nasdaq: ERIC) challenged Lucent Technologies Inc. (NYSE: LU) for the right to buy Ethernet equipment company Riverstone Networks Inc. (OTC: RSTN.PK) . (See Ericsson Wants Riverstone.)

A few days later Lucent bid higher and won the prize. (See Lucent to Spend $207M for Riverstone and Lucent/Riverstone OK.)

So where does that leave Ericsson's carrier Ethernet strategy? Bidding for Riverstone suggests the vendor, better known for its wireless activities until it snapped up wireline vendor Marconi, believes it has a hole in its product portfolio. (See Ericsson Buys Bulk of Marconi.)

Not so, says Peter Linder, wireline technical director at Ericsson. He says the main reason behind the bid was the long-standing partnership between Marconi and Riverstone: "They have worked together in the past so it was natural for us to look at Riverstone." (See Riverstone Hitches a Ride With Marconi.)

And losing out to Lucent isn't a major blow, according to the Ericsson man. He says his company has some Ethernet capabilities from the Marconi deal and from another acquisition made in 2005, of Axxessit. (See Ericsson Swoops on Axxessit.)

"We also have established partnerships with Cisco Systems Inc. (Nasdaq: CSCO) and Extreme Networks Inc. (Nasdaq: EXTR)," notes Linder, and losing the bidding war for Riverstone "hasn't altered our strategy. The partnerships give us a great deal of flexibility and have worked well for us up to now."

Stan Hubbard, senior analyst at Heavy Reading, notes that even though Riverstone has partnered with Lucent, Marconi, and Chinese vendor ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), "Riverstone was more strategic to Lucent. Ericsson has a longstanding relationship with Extreme, and I would expect those ties will become more important now."

Hubbard notes, though, that Riverstone and Extreme have different approaches to the rollout of Ethernet infrastructure. "There is a different technology angle at play here. Riverstone is more strongly in the MPLS/VPLS camp, while Extreme is highlighting the value of Mac-in-Mac technology as one option for building out next-generation, carrier-grade Ethernet networks."

So, while Extreme and Cisco can provide backup, will Ericsson keep looking to take ownership of more Ethernet equipment assets? Linder says his company's "chief strategy is to create a strong foothold in transport and access, two volume segments," which the Marconi acquisition has helped deliver.

"Add to that our softswitching and VOIP systems, and our partners, and we have a network transformation story for carriers. We don't believe it has to be an Ericsson product for every link in the chain."

But never say never. "We'll continue to look at things over time that make sense," Lindner adds.

And what of the current industry M&A chatter? At least one analyst believes Ericsson would be in the queue to pick up some Siemens Communications Group assets. (See Sources: Lucent, Nokia in Play for Siemens.)

Naturally, Linder declines to comment. "There seems to be different companies being speculated about -- that's the nature of the market at the moment."

— Ray Le Maistre, International News Editor, Light Reading