Having snared a number of hardware vendors and a messaging specialist in the past six months, Ericsson AB (Nasdaq: ERIC) has now shifted its acquisition focus to the telecom software sector, targeting billing specialist LHS Group in a cash deal worth €310 million ($420 million). (See Ericsson Offers to Buy LHS.)

Ericsson has already secured agreements to buy 75.1 percent of LHS's shares, including deals with the billing firm's major stockholders, General Atlantic Partners LLC , which owned nearly 48 percent, and LHS Beteiligungs AG, which owned 7.2 percent. Now it's offering the same price, €22.50 ($30.42) per share, for the rest of the shares.

The news sent LHS's shares soaring by nearly 13 percent today to close on the Frankfurt exchange at €22.55 ($30.49). Ericsson's stock closed up more than 1 percent at 26.40 Swedish Kroner ($3.83) on the Stockholm exchange.

In the past few months, the Swedish giant has bought router vendor Redback Networks Inc. , fiber access equipment firm Entrisphere Inc. , video processing firm Tandberg Television , and messaging platform vendor Mobeon AB . (See Ericsson Buys Openwave Rival, Ericsson Lands Tandberg TV, Ericsson: Tandberg Is Key to IPTV, Ericsson Buys Entrisphere, and IPTV Drives Ericsson to Redback.)

But billing?

Well, it's not as strange as it sounds, because Ericsson is already a major supplier of pre-paid billing and mediation systems, and, importantly, has a major services business unit that can help carriers implement and run their billing platforms and processes.

During a conference call today, Jan Wareby, senior vice president and head of Ericsson's Multimedia business unit, said the mobile systems vendor holds a 20 percent share of the global pre-paid billing systems market, which is set to grow as the majority of new mobile subscribers in developing countries such as India sign up for pre-paid service packages. In total, Ericsson has 150 mobile operator customers for its pre-paid billing system and 290 mediation system customers. (See Top 10 Emerging Mobile Markets and India Mobile Subs Soar in 2006.)

Of even greater importance in the future, though, is the capability to provide carriers of any type with a convergent billing system – one that can handle both pre- and post-paid customers that are being charged for any services. Such systems enable operators to cut their costs by running a single billing platform, rather than multiple ones, and to offer packages that include both pre- and post-paid services, for example, to families.

This is where LHS, a German firm with about 550 staff members that sells post-paid billing and customer relationship management (CRM) systems, comes into the equation.

LHS has 120 "installations" around the world at fixed and mobile carriers, with negligible overlap with Ericsson's billing customer base. And Ericsson and LHS have already teamed up to provide carriers with convergent billing platforms, so they know their platforms are compatible. (See StarHub Uses LHS, SFR Enables With LHS, LHS Wins Cosmote Deal, LHS Wins in Belarus, LHS Claims Customer Wins, and LHS Wins Billing Deals.)

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Wareby is confident that, with LHS on board, Ericsson can capture an increasing share of the overall telecom billing and charging systems market, which, it estimates, was worth $6 billion in 2006 and will grow to $16 billion in 2011 (including the value of in-house development by operators).

The analyst team at OSS Observer values the market differently, ascribing a value of $3.9 billion to commercial, off-the-shelf billing systems in 2006, but sees the same kind of growth, with that value rising to $6 billion by 2011.

OSS Observer senior analyst Peter Mottishaw says news of the Ericsson acquisition came as something of a surprise, but that it does make sense for the Swedish giant, giving it a position in the billing market's hottest sector, real-time convergent charging systems.

The deal gives Ericsson the post-paid capabilities it lacked, and LHS the in-house services organization it lost after it split from its previous parent, Schlumberger Ltd. , back in 2004. "Ericsson has a great services organization," notes Mottishaw. (See Return to Seller.)

It also gives Ericsson a business that's growing and will add to the vendor's earnings in 2008 (if the deal is completed as expected in the third quarter of this year). In 2006, LHS generated net income of €7.6 million ($10.3 million) from revenues of €71.6 million ($97 million), and in February provided revenue guidance of €86 million to 89 million ($116 million to 120 million) for 2007.

The main competition for a combined Ericsson/LHS would come from billing giant Amdocs Ltd. (NYSE: DOX), as well as the likes of Comverse Inc. (Nasdaq: CNSI), Convergys Corp. (NYSE: CVG), Intec Telecom Systems plc (London: ITL), and Oracle Corp. (Nasdaq: ORCL), though Mottishaw believes Amdocs and Ericsson would mostly be targeting different customers.

"Amdocs has been very successful with the Tier 1 operators in North America and Europe, while Ericsson has good relationships with the Tier 2 operators in Asia/Pacific and Central and Latin America, and LHS is not really a Tier 1 provider. They could end up going for different markets," says the analyst.

Perhaps more important on the competitive front is the implication for LHS's established partnerships, especially its close ties with Alcatel-Lucent (NYSE: ALU). (See LHS, AlcaLu Team Up and Alcatel, LHS, Extend Partnership.)

Wareby says LHS has "many partners," and that "this offer does not change those opportunities. We operate in a world of 'coopetition' – we compete as well as partner" with other major players, noted the Ericsson man.

LHS's other partners include Atos Origin S.A. , HP Inc. (NYSE: HPQ), IBM Corp. (NYSE: IBM), LogicaCMG plc (London/Amsterdam: LOG), Nokia Networks , Oracle, Sun Microsystems Inc. , and Tech Mahindra Ltd. . (See HP Tests LHS, LHS, Logica Partner on Billing, and LHS Billing Available on IBM.)

— Ray Le Maistre, International News Editor, Light Reading