Ericsson's Big Leap

Its new boss is stressing software and eyeing acquisitions

When Sven-Christer Nilsson was summoned to L.M. Ericsson's Stockholm headquarters for an early-morning chat with CEO Lars Ramqvist last month, he had an inkling of what to expect. After all, Nilsson and 19 other Ericsson insiders had undergone two days of psychological tests as part of Ramqvist's half-year hunt for a successor. Nilsson knew he was in the running for one of the most demanding jobs in Swedish industry. Yet when Ramqvist leaned over the boardroom suite's burled wood coffee table that day and asked him whether he'd take the job, Nilsson played it cool--and ultimately took a week to get back to Ramqvist with his answer.

Nilsson will need that kind of self-assurance when he starts as Ericsson's new boss on Mar. 30. Not only will the youthful 53-year-old take over Sweden's largest company but he will also face the crucial task of preserving Ericsson's technological edge in mobile phones, where it vies with Motorola Inc. and Nokia Group for global leadership. With the telecommunications and computer industries converging, Ericsson is in a race to develop advanced networks to help the world's phone companies provide the next generation of multimedia services, from videoconferences to speedy Net surfing over cellular phones. "The challenge will be evolving into a systems and software" provider rather than sticking with Ericsson's traditional role as a hardware supplier to telephone companies, Nilsson explains. "This is a big strategic shift for us."

LOTS OF CASH. To reach that goal, Ericsson is hitting the acquisitions trail. The company's bankers are already prowling the globe for deals in data communications--the company's "weakest point," Ramqvist told BUSINESS WEEK in a recent interview. The likely target is a company in the U.S., Nilsson adds, because that's where telecom and computers are converging most quickly. Ericsson has begun collaborating on some projects with data-communications companies such as Cisco Systems Inc. and Bay Networks Inc.

With a cash hoard of $3.7 billion and little debt, Ericsson is well positioned to do a deal. "We can make almost any sized acquisition" as far as the money is concerned, Ramqvist boasts. Cisco would be an attractive partner, but with a market capitalization of $66 billion vs. Ericsson's $36 billion, even insiders at the Swedish company admit acquiring the U.S. giant is beyond their reach. A smaller, less costly company still on its way up is a more likely target, Ramqvist notes. Data-networking companies such as 3Com Corp. and Bay Networks would be easier for Ericsson to swallow.

Ericsson is also interested in an acquisition to help diversify its management. Although 94% of the company's $21 billion in sales come from outside Sweden, Ericsson's executive ranks are strictly Swedish. And because of the country's high personal-tax rates, Ericsson has had trouble recruiting talented outsiders to Stockholm.

Ericsson's new CEO will be able to draw on his own experience as he seeks a U.S. partner. Indeed, Nilsson's familiarity with the U.S. was one reason he was tapped for Ericsson's top job. After working for a startup that developed systems for automated teller machines in Sweden, he was recruited to Ericsson in 1982. He jumped quickly from the components division to radio systems to Ericsson's mobile-switching business. For much of the 1990s, he ran the unit that sold cellular networks in the U.S., Ericsson's single largest market, and to other countries adopting the same standard.

That got him deeply involved with handling American customers. Nicolas Kauser, executive vice-president and chief of technology for AT&T Wireless Services, recalls asking Nilsson for Ericsson's help three years ago to develop an indoor wireless phone for big corporate customers. Nilsson came up with the money for the product, Wireless Office Service, which will hit the market this year. "He's very responsive. We went directly to him when we needed help," Kauser says.

AD BLITZ. A far tougher assignment for Nilsson will be filling Ramqvist's shoes. Ericsson's current CEO is a "strong person" and may be a hard act to follow, observes a senior exec from a rival company, adding that Ericsson's large size makes it "harder to generate growth and innovation." Indeed, since Ramqvist became CEO in 1990, Ericsson's stock has jumped fifteenfold. It's now trading at around 40 3/4. Return on equity has soared to nearly 28%, and the company earned a record $2.2 billion in pretax profits last year (chart). The profit surge was fueled by mobile handset sales--up some 87% last year--as Ericsson's heavy R&D investment in establishing the Europe-wide GSM mobile-phone standard has paid off.

Behind Ericsson's success is its youthful and flexible culture. Half of its 100,000 employees are under 30, and around 1,000 jobs a month are shifting to the fast-growing mobile business from Ericsson's troubled fixed-line phone unit, where margins have been squeezed by new rivals. The division has shed a fifth of its workforce and plans to lose an additional 10,000 in the coming two years.

It also looks as if Ericsson's bet on the next mobile multimedia phone may pay off. On Jan. 29, Europe's mobile-phone industry voted to adopt a standard drawing heavily from the one Ericsson had spent more than eight years and millions of dollars to develop. These phones will receive data nearly seven times faster than traditional fixed lines. Over time, analysts expect more users will shift to the high-speed mobile phones, abandoning traditional fixed-line phones. Says Douglas Smith, European technology analyst for Salomon Smith Barney in London: "Ericsson has a very significant head start."

The trick will be keeping it. While running hard to meet demand for its mobile handsets, Ericsson is launching a global advertising blitz to promote its brand name, starting in mid-February. It's also continuing to expand in Asia, despite recent turbulence. China, where Ericsson commands a 50% share of the fast-growing mobile business, is the company's second-largest market, accounting for 9% of sales. Ericsson aims for even higher sales in the region. On Feb. 4, Ramqvist jetted to Malaysia to inaugurate a new factory.

Will Ericsson's new CEO keep up the pace? Nilsson, who spent several weeks last summer on a 10-meter sailboat in the Bay of Biscay, knows something about navigating amid shifting winds. For 3 1/2 days, the boat and its crew were buffeted by gales. "It was hilarious. I never felt unsafe," recalls Nilsson, who enjoyed the thrill of surfing the whitecaps in a small boat. Considering the wild fluctuations of the telecom industry, Ericsson may have found the right captain.

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