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Ericsson: Too Swedish for Its Own Good?

By Stanley Reed Swedish phone giant Ericsson is finally giving a nod to persistent criticism that its ownership structure is antiquated. The current setup allows two Swedish investors, with only 7% of Ericsson's capital, to control the company. Now that it's hoping to raise $3 billion from existing shareholders, Ericsson is trying to placate them. That's why Chairman Michael Treschow now says he along with Ericsson's key

owners will try to work out a way to reduce the differential in shareholder voting power between Class A and Class B shares from the present 1,000-to-1 to just 10-to-1.

If it happens, such a move must be applauded. Even then, though, Ericsson may not be going far enough. With each Class A share having only 10 votes, Ericsson would still remain under the control of the same main owners -- Sweden's Wallenberg family and Industrivarden, a holding company connected with Stockholm bank Handelsbanken. Depending on what arrangements are worked out, they would likely have about 35% of the votes -- down from 84% now. Foreign owners have less than 2% of the votes.

Ericsson should consider shifting to one-share/one-vote -- the most commonly used standard in the U.S. While the company's owners did a credible job until the late 1990s, telecommunications, even in the current doldrums, is a global industry based on fast-changing technologies.

REALITIES SET IN. Keeping control in Swedish hands could stifle Ericsson, while sweeping reform of the ownership structure may revitalize it and bring its owners higher returns in the end. "Reform will increase the value for all shareholders," contends Marianne Nilsson, who is in charge of ownership issues for Robur, Sweden's largest fund-management firm, which holds a large Ericsson stake.

A one-vote/one-share system also might encourage Ericsson to face commercial realities. For too long, critics say, the company's engineer-dominated culture has pursued technology for its own sake, often at the expense of marketing and cost-controls. The price: $3.7 billion in losses for the 12 months ended on Mar. 31 and a 67% collapse in the stock price over the past year. In the first quarter of 2002, Ericsson lost an additional $380 million on sales of $3.8 billion.

The shortfall forced it into shedding some 13,000 jobs last year, with 25,000 more layoffs promised by 2004. The Swedish government, which is supporting the current owners, should ponder those job losses when it argues that the dual-share structure is best for Sweden. The government's reasoning is that Ericsson will employ more Swedes if it remains in Swedish hands.

LOST JEWELS. It is far from certain, however, if the dual-share system will prevent a sale to foreign owners. "The differentiated voting structure is not an obstacle if you have a determined buyer on the other side," says Sten Westerberg, senior adviser to Nordea Securities in Stockholm. He points out that two other crown jewels of Swedish industry -- the auto division of Volvo and drugmaker Astra -- were sold in recent years to foreign companies, despite what seemed to be firm Swedish control.

Astra, which the Wallenbergs merged with Britain's Zeneca in 1998, is a good model for Ericsson to consider. Before it was sold, Astra looked both too small and too short on management talent to make it in the global drug industry. Since the merger, AstraZeneca has thrived. Its stock has outperformed an index of other European pharmaceutical companies for two years straight.

To be fair, the global telecom industry has been battered. And Ericsson has suffered mightily for the poor judgment of its key customers, Europe's telecom operators saddled themselves with enormous debt by pouring tens of billions of dollars into mobile telecom licenses and takeovers in 1999 and 2000. Their shaky financial situation has forced them to drastically reduce their investments in the mobile telecom systems that Ericsson leads the world in supplying.

Ericsson also hurt itself. Its board was slow to make tough but necessary calls about senior management, analysts say. It was an open secret for more than a year that Ericsson's previous chairman, Lars Ramqvist, was headed for the exit. Yet the board did not tap Treschow to replace him until spring of 2002.

HOW WILL IT MANAGE? Treschow is one of Sweden's most respected executives, one who doesn't flinch at cost-cutting. Yet it's far from certain he's the solution to Ericsson's ills. Day-to-day management remains in the hands of the old-line Ericsson culture. One former board member remarks that the company still falls way short on marketing skills.

Ericsson might be better off with new international management. The best way to achieve such change probably would be through a merger with a multinational -- a move the Wallenbergs have considered before.

Past efforts to modernize Ericsson's ownership structure came to nothing. This time, there'll be "a serious attempt to resolve the issue," says a spokesman for Investor, the Wallenberg holding company. A key consideration, Treschow

acknowledges, will be compensation for Class A shareholders, who want to be paid for reducing their control. The market doesn't think that they deserve much: Class A shares are trading at only a 7% premium to Class B shares.

The Wallenbergs and everyone else associated with Ericsson should keep in mind that sharper, more street-smart management is the route to a higher share price. Reed is London bureau chief for BusinessWeek.

Additional reporting by Ariane Sains in Stockholm

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