Ericsson decides against big M&A in wake of Nokia/Alcatel-Lucent deal, will focus on organic growth

Ericsson (NASDAQ: ERIC) concluded after a review by its management that it can expand its business without pursuing a major deal, according to a senior executive at the vendor.

"We have a very strong focus on core development," Rima Qureshi, Ericsson's chief strategy officer, told Reuters. "We believe that the best approach, and the way we will go about it from a strategic perspective, is organic," she said.

Ericsson CEO Hans Vestberg reportedly scheduled a meeting with senior management in late May to discuss potential large-scale mergers and acquisitions that would help the company to compete against a merged Nokia (NYSE:NOK) and Alcatel-Lucent (NYSE: ALU). According to a Bloomberg report, Vestberg planned to discuss large-scale deals as one potential solution to maintaining the company's leading position in the global infrastructure market in the event the Nokia/Alcatel-Lucent deal gets approved.

However, it seems clear from Qureshi's comments that Ericsson has decided against major M&A, and that stance fits with the company's long-standing policy of pursuing organic growth. She said that Ericsson held a meeting earlier this month with its top 250 managers to discuss the state of the industry, and the company decided to continue with its existing businesses.  

In March, to boost profitability and better compete with Huawei, Nokia and Alcatel-Lucent, Ericsson said it would cut 2,200 jobs in Sweden, mainly in research and development and its supply chain. The cost-cutting program will run through 2017 globally. 

In mid-April Nokia agreed to buy Alcatel-Lucent in a $17.5 billion (€15.6 billion) deal that would form a powerhouse to rival Ericsson in mobile and fixed networks, though that deal will likely not be completed until the first half of 2016.

Qureshi said Ericsson will also continue to make relatively small bolt-on acquisitions to complement or fill gaps in its product portfolio or geographic reach. In recent years, the company has done that several times, especially in software and services. Ericsson bought Microsoft's (NASDAQ:MSFT) IPTV Mediaroom business in April 2013; in July 2014 Ericsson bought Telcocell, which specializes in system integration and business support systems (BSS). Ericsson beefed up its OSS/BSS capabilities with a deal to acquire MetraTech in July 2014, and in September 2014 Ericsson bought cloud-based video specialist Fabrix Systems for $95 million. In October 2014 the vendor purchased network software company Sentilla.

Ericsson thinks that by 2020, 20 percent to 25 percent of its revenues will come from other types of customers than operators, up from 15 percent in 2014. In addition to embracing the shift to software-defined networking and network functions virtualization like other vendors, Ericsson is targeting non-carrier customers in the cloud, IP networks, TV and media and OSS/BSS segments.

Vestberg and his management team have fully embraced the shift toward software and services, which generally carry higher margins. Some analysts have speculated that Ericsson might buy Juniper Networks or Ciena to boost its position in routing or optical networking. Ericsson already has established sales partnerships with both companies though, Reuters notes, and the purchase of a hardware-focused gear maker would undercut the company's software-centric strategy.

"We make decisions (which) are strategically correct for us, not as a reaction to what our competitors are doing. And our main focus is still organic growth," Qureshi said.

"We have a strategic direction we believe in," she said, adding: "We are aligned in the areas that we want to grow."

For more:
- see this Reuters article

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