BTAB on ERICY: ERICY: Fills Out IP Product Line With Torrent And Touchwave
Acquisitions
Bankers Trust Research/BT Alex. Brown Research
Brian Modoff,Ian Toll
April 13, 1999
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ERICSSON, INC. [ERICY] "MKT. PERFORM"
Fills Out IP Product Line With Torrent And Touchwave Acquisitions
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Date: 04/13/1999 EPS 1998A 1999E 2000E
Price: 25.5 1Q 0.12 0.05 NE
52-Wk Range: 34 - 15 2Q 0.21 0.14 NE
Ann Dividend: 0.21 3Q 0.20 0.16 NE
Ann Div Yld: 0.82% 4Q 0.28 0.34 NE
Mkt Cap (mm): 50,924 FY(Dec.) 0.81A 0.70 1.05
3-Yr Growth: 15% FY P/EPS 31.5X 36.4X 24.3X
CY EPS 0.81 0.70 1.05
Est. Changed No CY P/EPS 31.5X 36.4X 24.3X
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HIGHLIGHTS:
-- Ericsson announced two private company acquisitions, Torrent
Networking Technologies Corporation and Touchwave, Inc.
-- Torrent manufactures gigabit edge router/concentrators for the network
edge
-- TouchWave, Inc. provides Voice over IP products and services to
enterprise networks
-- Ericsson's strategy is to build data routing technology expertise
internally and through small acquisitions, rather than acquiring for
market share
-- However, CEO Sven-Christer Nilsson stated on the conference call that
Ericsson may reverse course and acquire a larger player in the future.
-- Ericsson characterized these acquisitions as slightly negative to EPS
in 1999, insignificant to revenues in 1999, and slightly accretive in
2000
-- Ericsson is due to report 1Q 1999 results on April 22, we expect to
hold off making any changes to estimates until that time, all else
being equal.
-- We continue to rate Ericsson stock "market perform," based on its
poorly positioned handset product line, slowing revenue growth, and
near-term risk to current estimates.
DETAILS:
Ericsson announced two private company acquisitions, Torrent Networking
Technologies Corporation and Touchwave, Inc.
These acquisitions fill out Ericsson's IP product line. We expected these
or similar transactions to be announced 1H 1999. They are consistent with
the company's stated strategy of building its market position in datacom
through a "string of pearls," targeting small private players rather than
pursuing larger acquisitions. We do not expect these acquisitions to
provide Ericsson with an immediate strong market position in datacom. Like
all other carrier class equipment vendors, Ericsson is facing the challenge
of competing with a dominant Cisco in an unfamiliar market.
TORRENT
Torrent Networking Technologies Corporation is a start up headquartered in
Silver Spring, MD that manufactures gigabit edge router/concentrators for
the network edge. The company began commercial shipments of its IP9000
Gigabit Router in April 1998. Early customers included MCI Worldcom,
Williams Communications, Extranet, Metawire, and GTE. The transaction will
be a $450 million cash purchase. This product will complement Ericsson's
Juniper Networks investment in core gigabit routers (AXI 520) of the
network, and its ACC Tigress remote access concentrator product.
TOUCHWAVE
TouchWave, Inc. provides Voice over IP products and services to enterprise
networks. The acquisition fills out Ericsson's IP-based enterprise network
product offerings, including IP telephony, wireless LANs, and network
services software such as voice mail and auto-attendant. Ericsson will
target Internet Service Providers with this product line. Ericsson will
acquire TouchWave in a $46 million cash purchase.
CONCLUSION
These announcements further Ericsson's stated "string of pearls"
acquisition strategy, which involves numerous smaller private company
acquisitions to the exclusion of larger public company acquisitions (such
as Lucent/Ascend or Nortel/Bay). Ericsson's moves into the datacom world
now include:
-- a minority stake in Juniper, a core Terrabit router company
-- a minority interest in Mariposa, an ATM edge switch vendor
-- acquired ACC, a remote access concentrator vendor
-- Torrent acquisition
-- Touchwave acquisition
Ericsson's strategy has been to build data routing technology expertise
internally and through small acquisitions, rather than acquiring for market
share. This strategy is unproven, although it may involve less risk than
the larger acquisitions that have been pursued by competitors such as
Lucent and Nortel. European accounting restrictions on using pooling of
interest accounting in acquisitions is one factor that constrains
Ericsson's options. However, CEO Sven-Christer Nilsson stated on the
conference call that Ericsson may now be revisiting that strategy, and may
choose to pursue a larger player that could provide them with acquired
market share, in the future.
These announcements are further evidence that the wireless infrastructure
vendors are making IP and ATM, both for network core and enterprise
markets, a key element of their strategic road maps. It remains to be seen
whether these players can compete effectively against Cisco.
Ericsson characterized these acquisitions as slightly negative to EPS in
1999, insignificant to revenues in 1999, and slightly accretive in 2000.
As Ericsson is due to report 1Q 1999 results on April 22, we plan to hold
off making any changes to estimates until that time, all else being equal.
We continue to rate Ericsson stock "market perform," based on its poorly
positioned handset product line, slowing revenue growth, and near-term risk
to current estimates.
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