Ericsson Buys Redback Networks for $2.1 Billion

Telecommunications gear maker Ericsson (Nasdaq: ERICY) said Tuesday it would buy Redback Networks, which makes routers used by telecom carriers to direct data traffic, for US$2.1 billion.

Sweden-based Ericsson said it would pay $25 in cash for each of share Redback stock, an 18 percent premium over Tuesday's closing price.

Back in Demand

Ten-year-old Redback competes with Juniper Networks (Nasdaq: JNPR) and Cisco Systems (Nasdaq: CSCO). After a roaring start during the dot-com era, Redback is finding its data routing gear in demand again as telecom companies widen their offerings to focus on data as well as voice.

Ericsson said the purchase would be part of its strategy to "help telecommunications carriers lower costs and upgrade networks for broadband, telephone, video and mobility services."

Plans call for Redback to retain its management team and operate as a wholly-owned subsidiary of Ericsson. It will also continue its own research and development efforts, focusing on new video and mobility technologies.

"This agreement is about accelerating market growth," said Redback President and CEO Kevin DeNuccio, a former Cisco executive who helped lead Redback out of bankruptcy in 2004. "We believe Redback now will have the global reach and financial resources to accelerate its own routing technology innovation and grow market share faster than our traditional routing competitors."

Ericsson CEO Carl-Henric Svanberg said his company is buying a market leader with technology that outpaces that of its rivals. "Redback has always had a well known technology advantage over its larger routing competitors in broadband services edge routing," he said. "We believe the combined strengths of both companies in mobility and IP routing will create significant value for customers and shareholders."

Seeking Growth

Although the price tag on the deal seems high, Ericsson said the future potential represented by Redback's technology and Ericsson's strong relationship with many carriers -- for whom it is a top provider of mobile network gear -- make it a smart play. It also argued that building similar technology to Redback's would take it, or its rivals, several years of development time.

With the buy, Ericsson also gains new customers, such as Verizon Communications and AT&T (NYSE: T) at a time when more carriers are seeking to build networks that can seamlessly carry voice, data and video, and extend all three offerings to mobile devices.

Redback counts 15 of the top 20 telecom companies worldwide among its customers.

The move makes Ericsson far more of a rival to Cisco Systems, whose gear is still responsible for moving some two-thirds of the world's Internet traffic.

Ericsson said the deal would decrease earnings this year, but it is getting a company on a strong revenue growth run. Redback's sales were on pace to be up nearly 80 percent this year, with analysts on average forecasting growth of 23 percent for 2007 and 31 percent for 2008.

The Yankee Group predicts the worldwide market for Internet Protocol edge routers will top $5 billion annually within two years, and Ericsson said it believes as many as 2 billion users of wire-line and wireless phone networks around the world are primed for an upgrade of their networks to all IP-based routing.

European Invasion

Despite its strong growth, Redback would have been hard pressed to survive on its own, according to Lehman Brothers analyst Jeffrey Kvaal, particularly amid a strong trend toward consolidation in the gear industry.

"Ericsson's global footprint and carrier relationships will provide support to this growing revenue stream," he said.

The purchase comes a month after France-based Alcatel (NYSE: ALU) completed its takeover of Lucent Technologies (NYSE: LU), creating the world's top gear-making firm in the process.

Nokia (NYSE: NOK) and Siemens (NYSE: SI) are also merging their networking business lines in a bid to expand their offerings.

With Redback, Ericsson is extending a buying spree of its own. A year ago, it paid $2.1 billion to buy Marconi, a purchase that enabled it to begin offering fixed-line network products alongside its own wireless gear.

Multi-service edge routers are being sought after by telecom companies because they can help them deliver more services to customers, Gartner (NYSE: IT) analyst Jennifer Liscom explained.

"Edge routers can help telecom operators deliver bundled offerings of broadband voice, data and TV from a single core network," she added.

Ericsson is seeking renewed growth and recognizes that video and mobile data services are where sales expansion is most likely to come.

Last month, the company said it would cut as many as 400 jobs at its Swedish headquarters in a cost-cutting measure. Those cuts still left the company with more than 50,000 employees worldwide, including those employed by the Sony Ericsson joint venture, which makes mobile phone handsets.