No wonder investors have panicked – Ribbon waves goodbye to its CEO as it announces an unexpected merger with transport network equipment specialist ECI Telecom. But why?

November 15, 2019

4 Min Read
Ribbon Reels in ECI, Offloads CEO

Not since model Jerry Hall announced she was tying the knot with grizzled media mogul Rupert Murdoch has there been a more unlikely marriage as the one announced early Thursday between Ribbon Communications and ECI Telecom.

The deal has been announced as a merger, but Ribbon -- the name adopted by the 2017 combination of Genband and Sonus -- is handing over $324 million in cash and 32.5 million shares to bring ECI on board. (See this press release for full details.)

Those Ribbon shares are worth a lot less than they were earlier in the week, as news of the deal came hand-in-hand with the departure of Ribbon CEO Fritz Hobbs, who handled the Genband/Sonus integration and teed up the ECI deal. Ribbon's stock tanked by 23% to close Thursday at $3.00.

The CEO role at Ribbon is being shared temporarily by Steven Bruny, head of Global Sales and Services, and Kevin Riley, chief technology officer: They will now have to field the questions from colleagues, partners and customers about Hobbs's departure and, more pertinently, the somewhat head-scratching deal.

Because, let's face it, Ribbon + ECI is an unconventional combination: Ribbon sells VoLTE platforms, session controllers, signaling systems, unified communications tools and analytics software (among other things) to service providers, and a range of cloud-based communications, messaging systems, SD-WAN, SIP trunking and more to enterprises; ECI Telecom sells packet/optical transport systems and NFV elements (its Mercury family of virtual network functions, NFV infrastructure, MANO and universal CPE) to network operators and large enterprises.

The two companies don't look like a natural fit.

But that might just suit Ribbon. In 2018 it generated revenues of $578 million and sees its total addressable market (TAM) as hitting around $3 billion in 2022, so growth in what is a competitive market is likely limited. Its sales for the first nine months of this year, at $402 million, were down a few percentage points year-on-year. Ribbon has likely peaked.

ECI, meanwhile, is on a tear. It almost doubled its revenues from 2015 to 2018, from $160 million to $304 million, adding more than 100 new packet/optical customers in the past three years.

Figure 2: Just Look at That Packet/Optical Growth! Source: Ribbon Communications presentation Source: Ribbon Communications presentation

By adding ECI to its portfolio, Ribbon believes its TAM leaps from $3 billion to $39 billion in 2022, with 4G/5G-related mobile xhaul (fronthaul/midhaul/backhaul) transport network investments accounting for more than $8 billion of that TAM number alone.

Figure 1: Addressable Market Explosion!! Source: Ribbon Communications presentation Source: Ribbon Communications presentation

"If you are looking for the usual 'synergies' of M&A, you're not going to find them," notes Heavy Reading's principal analyst, optical networking and transport, Sterling Perrin. "Ribbon is looking to move into a completely new line of business and has chosen transport as the market to enter, and ECI as the company to get them in. They see flatness in their core voice business and growth in transport, particularly the xhaul transport opportunities tied to 5G. There are gains to be had if they can pull it off. ECI has, for decades, been a solid player in packet-optical but lacking in two areas: marketing power and presence in North America. Ribbon has a strong presence in North America, but they will need to translate those voice business relationships into transport business relationships. It's not easy, but ECI will have far better potential in North America as part of Ribbon than it did on its own. Ribbon will also have to preserve ECI's strong existing relationships with operators outside North America," notes Perrin.

Part of that 5G attraction for Ribbon will have been that ECI is a preferred transport equipment partner for mobile network infrastructure giant Ericsson.

The deal also ends an interesting couple of years of speculation about ECI's future, during which it abandoned some IPO plans and was linked to some M&A scouting by Cisco: Now it has found a home.

In the meantime, Ribbon will need to placate its investors: Its share price is down another 5% to $2.85 Friday.

— Ray Le Maistre, Editor-in-Chief, Light Reading

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