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Routing

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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lightreceding 12/5/2012 | 3:31:21 AM
re: Ericsson Offers $2.1B for Redback This is hardly a "stunning purchase." Redback was being shopped for many years. Juniper passed on them and bought Redstone/Unisphere from Siemens. Alcatel passed and bought Timetra, Nokia bought Amber after talking to Redback, and ECI about Laurel after discussions with Redback.

Ericsson paid top dollar for circa 1999 technology and didn't get the core development team, which has moved on. They probably could have bought Siara before it went to Redback in 2000 with inflated stock.

This move does not affect Juniper immediately since Ericsson was not selling the Juniper M Series which the Redback (formerly Siara) SE competes with. They are selling the T-Series which is a core, router far beyond the Redback SE in performance and density.

Large companies like Ericsson hardly have a history of success with routing. Lucent destroyed almost all of its acquistions in this space. Nortel ruined Bay Networks and Alcatel killed 5 startup acquisitions before they bought Timetra. Siemens gave up and sold Unisphere to Juniper. Nokia acquired Amber and killed it. And what about Ericsson and Torrent? The fact they they are selling the Juniper T-Series tells you what happened to the Torrent product.

If you have any facts to back up your opinions I would be interested in hearing them.
exbgp 12/5/2012 | 3:31:22 AM
re: Ericsson Offers $2.1B for Redback Geeks at Laurel may be able to answer this::-)
lightreceding 12/5/2012 | 3:31:26 AM
re: Ericsson Offers $2.1B for Redback The original Redback product, the SMS, is obsolete. It was widely deployed in carrier networks for broadband aggregation, but due to lack of feature development and substandard performance it was being displaced by the Juniper ERX and some other competitors.

In 2000 Redback had merged with Siara and acquired the Smartedge platform which was built and marketed as a metro transport device with routing. After about three years of internal struggle Redback finally got the SMS features on the Smartedge and refocused it as an edge router with broadband aggregation.

Redback has had some success with replacing the SMS with the Smartedge and some sales of the Smartedge as an edge router. They are marketing it as a transport device for IPTV and they have done some development in this area, such as increasing the Ethernet port count.

dellman 12/5/2012 | 3:31:28 AM
re: Ericsson Offers $2.1B for Redback
AFAIK, most of the installed redback products are old; most probably they may become end of life soon. for the last couple of years, redback was focussing on survival.
Not sure how much progress they are making to update the products; it may be necessary to build a new platform for future( for IPTV)
Ericsson may be better off building a box from redback's expertise( if they have any!!)
chip_mate 12/5/2012 | 3:31:30 AM
re: Ericsson Offers $2.1B for Redback "Given that Redback has lost all of its founding engineers for the Smartedge I don't expect it to evolve in to a core router.

Ericcson is mainly selling core routers from Juniper and the Redback deal will only stop them from selling Juniper edge routers.

Cisco is still struggling to get the CRaSh 1 working so it will be some time before they can seriously erode Juniper's share."



Wrong. Juniper has good routers and good market share. This move will hurt Juniper hard, but your company may, and should, recover.
It is about Global sales numbers, and the Swedes just placed their Global bet.

It is my opinion that ERICY made a stunning purchase.
Not one to move their position or stock more than a percentage or two, but it's not about that anymore. It's about growth. Slow, methodical, mechanical.


lightreceding 12/5/2012 | 3:31:31 AM
re: Ericsson Offers $2.1B for Redback Given that Redback has lost all of its founding engineers for the Smartedge I don't expect it to evolve in to a core router.

Ericcson is mainly selling core routers from Juniper and the Redback deal will only stop them from selling Juniper edge routers.

Cisco is still struggling to get the CRaSh 1 working so it will be some time before they can seriously erode Juniper's share.

pnni-1 12/5/2012 | 3:31:57 AM
re: Ericsson Offers $2.1B for Redback I wonder what will happen to the BXR 1000 and 5000 edge routers?

indophile 12/5/2012 | 3:31:57 AM
re: Ericsson Offers $2.1B for Redback Cheap & Strategic buy for Ericcson, quietly done too...enter with IP Edge and than have the edge box become core over time for both the Mobile 3G + Wireline IP Markets..

Ericcson wants to make its intent clear that it wants to be a significant Wireline player on the back of Marconi (Optical) + Redback (IP Edge) alongwith Cisco & Alcatel...

Negative for Juniper as there 10-15% captive Ericcson base will erode with time. Where will they make up as they are losing sheen in the core routing market to Cisco & Edge to Alcatel..

tsat 12/5/2012 | 3:17:06 PM
re: Ericsson Offers $2.1B for Redback Don't you think that if Mot wanted Juniper, it would have happened back when the stock was below 15?

Juniper certinaly does appear to be the odd player out now. Will it grow into a major player? Or languish?
dellman 12/5/2012 | 3:17:09 PM
re: Ericsson Offers $2.1B for Redback
If MOT wants to make a bold statement, buying Juniper may make sense. people will start talking about it and everybody will be excited about the clash of titans ( cisco, alcatel-lucent, ericsson, motorola)...
But the price will be too high and Juniper comes with a lot of extra (options probe).
They could buy Tellabs
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