Will Ericsson Join the M&A Arms Race?

Reports suggest Ericsson might respond to the acquisition of Alcatel-Lucent by Nokia with a major deal of its own – but would that make sense?

May 29, 2015

5 Min Read
Will Ericsson Join the M&A Arms Race?

There's no doubt the communications networking industry has caught M&A fever, both in the service provider and vendor markets as companies seek scale and diversification. (See Charter Seals Deals for TWC, Bright House and Avago Seals Deal to Buy Broadcom for $37B as just two examples of enormous deals announced this week alone.)

One of the biggest deals announced this year is, of course, the planned acquisition of Alcatel-Lucent (NYSE: ALU) by Nokia Corp. (NYSE: NOK).

Now a Bloomberg report suggests Ericsson AB (Nasdaq: ERIC) might consider countering the threat of a bigger, stronger Nokia with a major acquisition of its own. Suggested targets include Ciena Corp. (NYSE: CIEN), an Ericsson partner, and Juniper Networks Inc. (NYSE: JNPR).

Arguments could be made for both of those: Ciena is one of the leaders in the transport networks sector and has been developing SDN capabilities with Ericsson; Juniper is one of the leading IP networking vendors with a lot of SDN- and NFV-related R&D under its belt and would provide Ericsson with greater traction in the enterprise market. (See Ericsson's Ciena Tieup: It's a Migration Thing.)

Ciena has a market value of about $2.8 billion currently, while Juniper's market capitalization is $11.2 billion: Ericsson could afford either, or both.

And it's not like Ericsson isn't at home to growth through M&A: Its current positions in the video/TV technology and Service Provider Information Technology (SPIT) sectors are the result of a series of acquisitions, while its IP networking assets came from the purchase of Redback. The Swedish company has been busy supplementing its mobile network infrastructure and global services business lines through M&A activity during the past decade so such activity is in its corporate DNA.

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But if Ericsson was to open its wallet and splash out on a significant acquisition, would it make sense to spend its money and go through the cultural and organizational pain of a corporate integration to acquire more network infrastructure assets? It obviously makes sense to examine the competitive impact of Nokia's move for Alcatel-Lucent but Ericsson is not relegated to minnow status as a result of its Finnish rival's expansion: Ericsson is, after all, a company with annual revenues north of $26 billion (depending on exchange rates).

Such a move would also fly in the face of Ericsson's stated position from just a month ago, when its CFO Jan Frykhammar told Light Reading that Nokia's move doesn't change the Swedish company's position. (See Ericsson Not Planning Big M&A Response to Nokia/AlcaLu.)

Financial analysts are also skeptical, though with caveats. Simon Leopold at Raymond James Financial Inc. (NYSE: RJF) stated in a research note:

  • We doubt, but we don't rule out: We think if Ericsson makes acquisitions, it is likely to look at smaller transactions with a bias toward software and video, consistent with the pattern over the last five years. Nine of Ericsson's ten deals were software-oriented. We believe Ericsson's R&D efforts are focused on evolving toward a more software-centric business, as well as higher-value services and routing. We also think it strives to evolve its vertical mix away from wireless telcos. Juniper and Ciena are mentioned most often as targets; we doubt either happens, but would consider Juniper more likely and logical.

That view makes sense to me, given the CFO's response to our questions last month and the need for vendors to boost their software, systems integration and IT skills bases to meet the needs of the emerging New IP era characterized by the ongoing integration of telecoms and IT. Ericsson has been boosting those capabilities with M&A activity during the past year and through its own R&D, with the launch of the Hyperscale Datacenter System (HDS) 8000, developed with Intel, being a prime example.

So will we see a major M&A response by Ericsson to the Nokia/AlcaLu deal? I don't think so. Will we see Ericsson actively acquiring companies to fill in gaps and expand its cloud, SDN/NFV, systems integration, professional services and software capabilities? Absolutely.

— Ray Le Maistre, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Editor-in-Chief, Light Reading

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