LM Ericsson Telephone Company (ERIC) has completed the acquisition of Nortel’s Multiservice Switch business. This acquisition gives Ericsson access to a strong product portfolio and installed base in the data segment and also the supply of platforms for the recently acquired CDMA and GSM units.
This follows Ericsson’s announcement on Sep. 25, 2010, that it was entering into an asset purchase agreement for substantially all of the assets of Nortel’s Multiservice Switch Business.
As a technology and market leader in wireless equipment (based on the GSM standard), Ericsson stands to benefit from the continued growth of the wireless industry, especially in the emerging markets. GSM-based network expansions in the emerging markets (including Latin America, Eastern Europe, Africa and China) are expected to drive moderate revenue growth over the next several years.
Having established partnerships with local companies and having set up R&D centers in numerous locations, Ericsson is well positioned to win additional network expansion contracts in Asia over the next couple of years. In addition, Ericsson has been winning more than its share of 3G contracts, including a contract to provide High Speed Downlink Packet Access (HSDPA) technology to Cingular Wireless (the largest wireless carrier in the U.S.).
However, we expect the continued consolidation in the telecom industry to hamper growth and squeeze margins over the long term as competitors that cannot compete on technology will begin to cut prices to win business.
Going forward, “catch-up” capital spending by the wireless carriers is likely to be replaced by lower-margin 3G equipment rollouts and network builds in price-sensitive emerging markets. In this environment, Ericsson finds it prudent to plan for flattish development in the global mobile infrastructure market and good growth in the professional services market.
Risk factors include potential negative effects of the continued uncertainty in the financial markets and the weak economic business environment on operators’ willingness to invest in network development. Another risk factor involves uncertainty regarding the financial stability of the suppliers due to a lack of borrowing facilities, or reduced consumer telecom spending, or increased pressure on Ericsson to provide financing.
Headquartered in Stockholm, Sweden, LM Ericsson Telephone Company is a multinational company engaged in manufacturing and selling wireless infrastructure equipment to the telecom sector. It is a total network solutions provider, serving wireless and wireline operators, enterprises and consumers.
The company is primarily a supplier of global system for mobile communications (GSM)-based equipment, and looks to benefit from the next generation systems as more broadband content is being streamed to mobile devices, prompting network providers to upgrade their networks. Major competitors include Alcatel-Lucent (ALU) and Nokia Siemens Networks, a joint venture of Nokia (NOK) and Siemens (SI).
We currently maintain our Neutral recommendation on Ericsson, with a Zacks #3 Rank (Hold recommendation) over the next one-to-three months.
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