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Ericsson Open to Bigger M&A Deal After Nokia-Alcatel

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Ericsson Open to Bigger M&A Deal After Nokia-Alcatel

Ericsson AB is open to a transaction to counter a move by rivals Nokia Oyj and Alcatel-Lucent SA to combine and overtake the Swedish company as a leading provider of network equipment, said people familiar with the plans.

Chief Executive Officer Hans Vestberg plans to gather with his top managers next month to discuss strategy, and a key area is what Ericsson can do to respond after Nokia’s $16.6 billion acquisition of Alcatel-Lucent, said one of the people, who asked not to be identified discussing private deliberations.

The shift in thinking at Ericsson, which has so far relied on smaller purchases, underscores a need by network providers to offer a more complete range of products. Phone carriers are expanding to wireless, broadband and video access and are seeking vendors who can build networks for all such services.

“I see no reason why we, given the right preconditions, would exclude a larger deal,” Ericsson Chairman Leif Johansson said in an interview this month. “But as you know, there aren’t that many left.”

Ericsson was close to making a bid for Alcatel-Lucent late last year, but walked away because of concern that a transaction wouldn’t bring enough savings and other benefits, said one of the people. In April, Alcatel-Lucent agreed to be bought by Nokia, a combination that’s set to surpass Ericsson in sales.

A spokesman for Stockholm-based Ericsson declined to comment on the company’s acquisition plans.

Juniper, Ciena

With Alcatel-Lucent off the table, Ericsson has fewer options to gain the scale needed to keep its leading position.

Pierre Ferragu, an analyst at Bernstein in London, said a “natural route” for Ericsson would be to buy Juniper Networks Inc., a maker of Internet routers, and optical-networks maker Ciena Corp. Either target could help Ericsson “restore old order and avoid being marginalized,” Ferragu said.

Juniper rose as much as 4.7 percent to $28.26 in New York. If the stock closes at that level, it would the highest price in almost four years. The company has a market value of $11.1 billion. Ciena climbed as much as 3.4 percent for a market capitalization of $2.8 billion.

Ericsson added 0.9 percent to close at 94 kronor in Stockholm. Its credit-default swaps jumped to a seven-month high, signaling a deterioration in creditworthiness.

Ericsson’s annual revenue has been little changed for three consecutive years as demand for wireless gear has stalled. A purchase of Juniper, a smaller rival to Cisco Systems Inc., would give it products carriers need to offer broadband Internet access.

Ericsson isn’t confident that Juniper’s technology is what it needs in an increasingly software-dominated industry, said one of the people.

Action Needed

Vestberg has in recent years repeatedly said he prefers organic growth, and last month told Dagens Industri newspaper in an interview that Ericsson’s strategy is to only buy smaller companies.

The network market is in transition as phone companies demand wireless and fixed solutions for moving data to and from smartphones, smart-TVs, laptops and even kitchen appliances and wearable devices -- anything that can connect to the Internet.

Nokia’s purchase of Alcatel-Lucent gives the Finnish acquirer more fixed-line assets as demand for video services such as Netflix surges. China’s Huawei Technologies Co., which has outpaced its European rivals in growth, also provides both wireless and fixed-line networks.

Inevitable Trend

“Mergers like Alcatel and Nokia’s in the telecom-equipment industry are inevitable,” Patrick Drahi, the telecommunications tycoon, told a hearing at France’s National Assembly Wednesday. “It’s the only way Europe can deal with Chinese competition.”

Highlighting how Ericsson tried to make a deal with Alcatel-Lucent work, it also evaluated a joint bid with Nokia with a goal of splitting up Alcatel-Lucent’s assets, one of the people said.

A Nokia representative declined to comment. Alcatel-Lucent had held talks with many companies before it agreed to a sale to Nokia, Chairman Philippe Camus told shareholders Tuesday.

“Ericsson can’t seem to grow fast enough on the fixed side so scaling organically to compete isn’t really possible,” Mathias Lundberg, an analyst at Swedbank AB in Stockholm, said in a phone interview. “Nokia will be a strong rival if they can integrate as planned, so there’s naturally pressure for Ericsson to seriously consider their options.”

(Updates with credit default swaps in 10th paragraph.)