Swedish-Based Ericsson In Talks To Buy Networking Companies
Dow Jones Online News, Friday, June 19, 1998 at 01:59
(Published on Thursday, June 18, 1998 at 22:08)
By Wall Street Journal staff reporters Gautam Naik in London and Almar
Latour in Stockholm
As phone-equipment makers and networking companies converge, Telefon
AB L.M. Ericsson has decided it can't afford to remain a wallflower any
longer.
The Swedish telecommunications equipment maker is looking at 10
networking companies in the U.S., and has already begun discussions to
acquire three of them. "We're in negotiations with three companies, each
worth several hundred million dollars," said Anders Igel, an executive
vice president at Ericsson in charge of its telecommunications business,
in an interview. "We don't know the results yet," he said, adding that
the deals may yet collapse.
Discussions by Ericsson were triggered by a huge shift taking place
in the telecommunications industry: The world's century-old phone
networks are gradually being made obsolete by the Internet. Traditional
phone systems use a "circuit switch" system specially designed to carry
voice calls. But when it comes to handling the explosive growth in data
traffic, Internet technology does it much better.
The statistics tell the story. Almost half of the traffic carried on
a typical phone network today is data, and the rest is voice. But in two
years' time, the volume of data will be five times that of voice,
according to industry estimates. And by 2005, the volume of data traffic
is expected to be more than 20 times the volume of voice calls.
Phone-service providers were the first to recognize this change.
Sprint Corp., for instance, recently disclosed that it had spent $2
billion in the past few years to create a new integrated voice-data
network. Now telecommunications-equipment makers like Ericsson have
caught on as well. While these equipment giants will continue to supply
traditional phone switches for routing voice calls, Ericsson and its
rivals increasingly must offer phone operators a whole range of hubs and
routers, the special switches that route data traffic over the Internet.
"If Ericsson fails to get into the hub and router market, they won't
be able to provide a full product line. They could become a second-tier
player in the future," warns Laurent Douillet, analyst at Lehman
Brothers in London. Smaller U.S. router companies include Hypercom
Corp., Juniper Networks Inc. and Newbridge Networks Corp.
Rumors of an Ericsson acquisition surfaced earlier this week after
its rival, Northern Telecom Ltd., agreed to buy Bay Networks Inc. for
$7.7 billion. Observers speculated that the Swedish giant would pursue a
similar deal, most likely targeting 3Com Corp. or Ascend Communications
Inc., two large U.S. Internet product makers. The buzz caused Ericsson's
American depositary receipts to rise $1.0625, or 4%, to close at
$27.4375 on the Nasdaq Stock Market on Wednesday. But yesterday,
Ericsson fell $1.5625 to $25.875.
Ericsson officials dismiss those rumors, and say they are more intent
on pursuing less-expensive start-ups. "Recently, there have been big
acquisitions in Silicon Valley that were overpriced," said Sven-Christer
Nilsson, Ericsson's chief executive officer, referring to the 35%
premium that Nortel agreed to pay for Bay. "We have certain acquisition
targets, but the price has to be right," he added.
Indeed, Ericsson officials confirm that the company had originally
considered buying a part of Bay Networks, but Ericsson said that Bay
didn't want to break up its business. The Swedish company abandoned the
idea six weeks ago and, although it is talking with smaller companies, a
big acquisition remains a possibility.
"We don't exclude making a major acquisition. We have the checkbook
to do it," Mr. Igel said, referring to the $1.5 billion to $2 billion in
cash that Ericsson is expected to have by the end of this year.
"You could have argued that was a reasonable way to go a few months
ago," notes Sean Faughnan, analyst at J.P. Morgan in London. But since
data traffic is becoming bigger faster than anyone foresaw, he added,
"Ericsson simply doesn't have the luxury of time."
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