Why Ericsson Is Bleeding

Shareholders have no say under its ownership system

On Mar. 28, Ericsson (ERICY ) President Kurt Hellström will walk onstage at a Stockholm sports arena and most likely be greeted by a chorus of angry catcalls. The annual meeting will be an unhappy one for the phone-gear giant: Its stock has dropped 75% from last year's high, and Hellström is vilified in the Swedish press as the man responsible for an expected $400 million to $500 million loss in the first quarter.

But it is wrong to pin all the blame on Hellström for the debacle at Sweden's most important industrial company. In fact, a good deal of responsibility for the company's troubles lies with Sweden's antiquated system of corporate governance, which shields Ericsson from the full pressure of its outraged shareholders.

At Ericsson, just two main owners, the Wallenberg family and a group of holding companies and funds connected to Handelsbanken, a Stockholm bank, maintain an iron grip with a minimal amount of capital. They do so by holding Ericsson A shares, which have 1,000 votes more than the B shares of which foreign shareholders have a majority. Thus the Wallenbergs and Handelsbanken each have a little over 42% of the votes, even though their control of Ericsson's total market capitalization is very small.

Such tight control might have worked in the past, when the telecom industry was more predictable. But Ericsson is struggling in a global market that demands quick changes of tack. In particular, its handset business has been outstripped by competitors such as Nokia (NOK ), and Ericsson has not acted fast enough to stem the losses. "You need someone to turn that place upside-down," says Carl Palmstierna, head of a Stockholm private equity fund.

A HUGE MISTAKE. But Palmstierna doubts that will happen as long as the present owners retain power. The Wallenbergs, who have engineered mergers at some of their other big companies, are said to be far more knowledgeable and open to change than Tom Hedelius, who serves as chairman of Handelsbanken and deputy chairman of Ericsson. A source says Hedelius operates at Ericsson like "the credit manager of a little savings bank." Hedelius declined to comment on Ericsson.

One huge mistake Ericsson has made is allowing Lars Ramqvist, who ran the company from 1990 to 1998, to retain enormous influence after going into semiretirement as chairman in 1998. Ramqvist picked a little-known executive, Sven-Christer Nilsson, as his successor, but gave him little breathing room. He ousted Nilsson just a year later and installed Hellström in his place. Ramqvist is said to interfere less with Hellström. In fact, he's been largely invisible lately, even while Hellström takes the heat. It is rumored that the Wallenbergs want to replace Ramqvist, but it won't be easy to find a chairman acceptable to both groups. (Ramqvist declined to comment.) Still, pressure is building. On Mar. 21, the Swedish Shareholders Assn., which represents retail investors, demanded that Ramqvist step down in favor of Percy Barnevik, the chairman of the Wallenberg holding company Investor.

WASTING TIME AND ENERGY. As the company's top leader, Ramqvist should be held responsible for Ericsson's inability to make tough decisions, such as failing to exit its doomed handset business, which cost the company $2.4 billion last year. Ericsson said in January that it would subcontract handset production, but investors are still wary. David E. Marcus, managing partner of Marcstone Capital Management, which specializes in European stocks, notes that Ericsson is "wasting tremendous time and energy on a business that is not making any returns." Marcus worries that the problems in the handset business are infecting the whole company, including Ericsson's world-leading mobile-telecom infrastructure business. "A lot of people are looking for new jobs," admits one employee. "The atmosphere is really bad."

It is not surprising that Sweden is almost hysterical about Ericsson. Klas Eklund, Chief Economist at SEB, a Stockholm bank, estimates that Ericsson has accounted for 15% of Swedish economic growth in recent years. "If Erics-son slows down, by definition Sweden slows down," Eklund says.

Marcus Wallenberg, Ericsson's deputy chairman and the CEO of Investor, says the board continues to support Hellström, but he concedes that the situation at Ericsson is "unusual." On dumping the mobile-handset business, Wallenberg claims "there are many things that they [management] are looking at." Wallenberg and his fellow owners should seriously consider dumping something else: the current two-tier stock system. Otherwise a company that still has great potential may very well be smothered.

By Stanley Reed in London, with Ariane Sains in Stockholm

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