Ericsson to Buy Telcordia for $1.2 Billion to Add Services

Ericsson to Buy Telcordia
Ericsson Chief Executive Officer Hans Vestberg is counting on increased mobile-data use and machine-to-machine communications to buffer slowing growth in voice traffic. Photographer: Casper Hedberg/Bloomberg

Ericsson AB agreed to buy Telcordia Technologies Inc. for $1.2 billion, the biggest deal in five years for the world’s largest maker of mobile-phone networks, to add more software and service support offerings.

Ericsson reached an agreement with Providence Equity Partners LLC and Warburg Pincus LLC to acquire all of Telcordia in an cash transaction and on a debt-free basis, it said in a statement today. The deal, which will add about 2,600 employees to the Swedish company’s staff, is expected to close in the fourth quarter, according to Stockholm-based Ericsson.

Ericsson is expanding in services to win and keep clients which rely on fast and efficient networks to sell new data offerings. The Swedish company on April 27 said first-quarter profit more than tripled as data-hungry devices such as Apple Inc.’s iPhone and tablet computers are fuelling demand for third-generation wireless systems enabling high-speed Internet.

“Operators don’t want to change their networks but they want to have them evolve, and software and services are key for that,” said Jean-Michel Salvador, an analyst at Alphavalue in Paris. “This is a way to buy people who know a lot about network evolution,” he said, adding that the price “wasn’t very expensive.”

New Services

The transaction needs regulatory approvals and will add to Ericsson earnings per share within 12 months after closing, the company said. Telcordia will strengthen Ericsson’s operations in North America and expand its position in the market for “service fulfillment, assurance, network optimization and real-time charging,” the Swedish company said.

The deal values Telcordia at 9 to 10 times estimated 2011 earnings before interest and taxes, according to Sanford C. Bernstein analyst Pierre Ferragu. Ericsson paid a median of 22.6 times Ebit in eight previous deals, according to Bloomberg data. That compares with a 22 times Ebit industry average, based on 55 telecom services deals worth more than $1 billion.

The price tag looks “very good,” Ferragu said in a note to clients. “We see the deal as well disciplined and creating good return to shareholders.”

Ericsson shares climbed 1.7 percent to 88.70 kronor in Stockholm trading today, valuing the company at $45.9 billion.

The market for software and systems integration was worth about $35 billion last year and is expected to show a compound annual growth rate between 6 and 8 percent from 2010 to 2013, Ericsson said.

Data Demand

“Telcordia has a good position with fixed operators and Ericsson is strong in mobile and other domains of the network so together we can create a strong position,” Jan Frykhammar, Ericsson’s chief financial officer, said in a telephone interview today.

The Swedish company said in April that mobile-data traffic more than doubled last year and is forecast to continue doubling every year in the near term. It forecasts worldwide mobile broadband subscriptions to double to 1 billion this year.

Ericsson also faces challenges as carriers are merging to cut costs. Russia’s VimpelCom Ltd. in April agreed to acquire Wind Telecom SpA, forecasting savings of $2.5 billion. AT&T Inc. said in March that its planned merger with T-Mobile USA could deliver $40 billion in savings.

Deutsche Telekom AG and France Telecom SA agreed to set up a purchasing venture that would let the two former phone monopolies save a combined 1.3 billion euros annually by jointly buying equipment. Huawei Technologies Co., China’s biggest phone-equipment maker, said in April it aims to more than triple annual sales to about $100 billion in the next five to 10 years as it expands into cloud computing and small-business networks.

Warburg Pincus and Providence purchased Telcordia, based in Piscataway, New Jersey, from Science Applications International Corp. in 2005. The company, which also offers support systems, network software and consulting, had sales of $739 million in the 12 months ended Jan. 31, according to today’s statement.

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