Ericsson plus Marconi equals powerful European competitor

Ericsson confirmed today that it will purchase the majority of the assets of Marconi for £1.2bn. Marconi shareholders will receive £2.50-3.00 per share in cash in the first three months of 2006, close to the price the shares were trading at before the company announced it was in takeover talks this summer.

Ericsson is buying all Marconi's telecoms equipment assets, including DSL, softswitch and optical assets. Surprisingly enough, Ericsson is also buying Marconi's data networking assets, and will not buy some of its UK and German operations. Ericsson was rumoured to be doing the opposite.

Comment: This is the end of the story, which began in April, of how the Marconi brandname — from the inventor of wireless transmission — has finally ended up in the pocket of the Swedish wireless networking giant.

Of course, everyone will claim that Ericsson is stepping back into the fixed market with this deal — at a time when fixed service providers have some cash back in their capital expenditure budgets. But for a company like Ericsson, the UMTS and mobile core network champion of the new century, are we really talking about a step back into fixed networking? After all, Ericsson is one of the five big legacy switching vendors.

The answer is less obvious than it might seem: it's all about network convergence. In buying some of Marconi's assets, Ericsson complements its product portfolio in areas that will be of high strategic importance for both mobile operators and for convergent network operators. And it is not only about the fixed business.

Marconi was the number-two world player in optical transmission (its products were made by Ericsson for years). Buying this product portfolio allows Ericsson to complement its wireless transmission portfolio with transmission solutions that are able to be really cost effective when both voice and data traffic are to be collected from the access network. This is a very smart move when we are talking about 1Mbps HSDPA access in UMTS networks.

Marconi was also a regional player in the DSL/MSAN access domain. We believe the combined company will have the number-three seat in a very competitive market, where even number one and two have thin margins. So why do this? With the acquisition, Ericsson will own a set of technologies that is used more and more as a backhaul technology for mobile networks!

Finally, buying a data-networking portfolio will allow Ericsson to benefit from some of Marconi's intellectual property assets in the Ethernet data networking area. This technology will be used more and more by service providers for collecting the increasing amount of data traffic carried out by mobile access networks.

If all these benefits are accompanied with some wins in the fixed networking area, it will be the cherry on the cake! But Ericsson has bought some other businesses for which the potential leverage is less clear. In the Softswitch domain, Ericsson may find interest in Marconi's R&D, but it already has a full portfolio up and running. In the ATM secure-routing domain, Marconi's (ex-Fore) solutions are primarily sold to US defence organisations. This is a tough set of US clients on which to leverage a very specific position.

After this deal, Marconi's remaining activities will become a professional services company called "Telent", which will mostly operate in the UK. It will retain Marconi's cash balance, and will bear Marconi's commitments with the UK pensions regulator. It probably didn't make sense for Ericsson to buy this capability, as Ericsson already has pretty important operations in the UK.

This deal ends a sales process that started in April after Marconi lost part of the £10bn BT 21st Century Network contract to Huawei and Ericsson. Since then, both companies had been rumoured to be looking into Marconi for a takeover, which finally ended up in this Marconi piecemeal sale. Though dedicated to the fixed market, the pieces bought by Ericsson also make sense in a mobile environment, and that is why we believe this is a very good acquisition for the company. From Marconi's point of view it is probably the best deal the company could have hoped for. Much of its expertise and R&D resources will move over to Ericsson, the services arm will remain as a separate ongoing interest with £300m in the bank, the pension deficit has been made up and its shareholders will get a fair price. Some job losses will be inevitable, but not on the same scale as might have been expected with some of the other deals that were being talked about. All in all, we believe the merger of the two companies will create a more powerful European competitor.