Friday, July 31, 2009

The Best Offense Is Defense: Ericsson ”wins” Nortel asset auction

Ericsson announced that it will acquire a majority of Nortel’s North American wireless assets for $1.13 billion in a bankruptcy auction (Ericsson/Nortel). The all cash bid represented a 74% premium over Nokia Siemens’ stalking horse bid of $650 million. Yes, that is 74% on top.

Why would Ericsson pay so much for an asset that will see revenues decline significantly over the next few years? Here are the highlights:

  • Strengthens Ericsson’s position in North America (also boosted by the recent Sprint deal)

  • Provides 400 employees focused on LTE (Long Term Evolution) R&D

  • Accretive to next year’s earnings with a profitable margin structure

However these points aren’t as solid as Investor Relations would have us believe. Progress in North American and growth in the LTE engineering base (next generation high speed networks will be based on LTE) could be created organically and at lower cost. Additionally, based on Wall Street estimates, while the deal may be accretive in 2010, the decline of the CDMA market will eat into total returns on capital which will come close to double digits, especially with minimal prospects of deal synergies and limited cost cutting opportunities. I do not see returns coming in above WACC.

In the end, this acquisition was a defensive move to keep Nokia Siemens from jumping into the North American market for a bargain price of $650 million. This keeps a major competitor out of Verizon’s LTE network buildout and puts Ericsson in strong position to capture a lion’s share of that opportunity.

Also, it’s interesting to note that RIM announced that they would have bid $1.1 billion for the asset but were prevented from doing so. Ericsson’s bid would have slightly topped that. Perhaps, Nortel should thank RIM for raising the bar and the price tag.

Irony strikes though as the big winner in the auction is a company that did not even make a bid, Alcatel Lucent. A big competitor in the North American market keeps Nokia Siemens out while Ericsson pays picks up the hefty tab. Attention to the folks at Ericsson and RIM, please expect your basket of baguettes, courtesy of the kind folks at Alcatel –Lucent’s HQ in Paris. Merci!

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