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Ericsson, Redback CEOs exchange vows

In a press conference this morning, Redback Networks Chief Executive Officer Kevin DeNuccio described the proposed acquisition of his company by Swedish wireless giant Ericsson as a marriage of the two most important technologies of future networks: Internet protocol and mobile networks.

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Redback, a strong player in the global IP edge router market, had already begun penetrating mobile carriers, but an Ericsson acquisition would give Redback’s products much greater geographic reach and muscle. For example, in response to one question this morning, DeNuccio indicated that the Ericsson deal may act as a catalyst over the next six months, helping Redback win some top-tier carrier accounts that it hasn’t been able to yet.

“A company based in San Jose [Calif.] can only do so much reaching out to the carriers of the world,” Ericsson CEO Carl-Henric Svanberg said in a separate press conference this morning. “It’s impressive what they’ve already done, but it’s also clear to them that they need an international organization to expand. Wireless is key for tomorrow’s networks. This is why they came to the point of being so successful and still felt they couldn’t make it over time on their own.”

Being part of a much larger company would also allow Redback to take more risks in product development, DeNuccio said. For example, Redback has been developing an answer to its competitors’ Ethernet aggregation switches but has not yet launched the product. Svanberg said that product was important to Ericsson as well. In addition, Svanberg promised compensation packages designed to retain key Redback personnel as it becomes a wholly owned subsidiary of Ericsson.

Some analysts have already said Ericsson is paying a high price for Redback (an 18% premium over the company’s Tuesday's closing stock price of $21.17). As Morgan Keegan analyst Simon Leopold pointed out in a research note this morning, Ericsson’s offer is 44 times Redback’s earnings per share, five times its enterprise value to sales and 21 times its enterprise value to earnings before interest, taxes, depreciation and amortization.

But on this morning’s press conferences, both companies urged analysts to look at Redback’s financials over a longer period of time. Ericsson’s offer is a 60% premium when Redback’s stock price is viewed over the last 90 days, Svanberg said. And in the context of an even longer time span, the premium gets smaller still.

In addition, DeNuccio said, Redback will continue to entertain bids from any other interested parties, making Ericsson’s premium a defense against rivals with eyes on Redback. Following Ericsson’s formal tender offer (expected next week), Redback shareholders will have 20 business days to accept or decline the offer.

An acquisition by Ericsson could reduce Redback’s need for some of its current partnerships with other larger vendors such as Nokia and Alcatel-Lucent. However, the percentage of revenue Redback gets from its reselling partner, Alcatel-Lucent, has grown smaller in the face of the Alcatel/Lucent merger anyway. And analysts expect Redback to rely even less on Alcatel-Lucent over time.

“Some of that will continue, I’m sure, and some of it will be replaced by others,” Svanberg said of Redback’s current partnerships. “There’s some loss there but we’re convinced the positive push easily offsets that part.”

Juniper Networks could lose revenue as Ericsson, a significant distributor of its core and edge routers, opts increasingly for Redback gear at the edge. In addition, a Redback acquisition may encourage other large vendors to scoop up mid-sized wireline vendors such as Juniper and Tellabs.

For Ericsson, traditionally a supplier of wireless equipment, the bid for Redback (long described as an attractive acquisition target for big vendors) is another bold move into the wireline space. “It will send a strong signal that we mean business in this field to anyone who has had doubts,” Svanberg said.

Pointing out that Redback has invested roughly half a billion dollars in its technology, Svanberg said, “It would cost us probably more than that should we do this on our own.”

For large core routers, Ericsson partners with Cisco Systems for wireline networks and Juniper Networks for mobile networks. But for intelligent routers such as Redback’s, Svanberg said, partnerships won’t suffice in the long term. “Tomorrow’s switches will be intelligent routers combined with IMS,” he said. “Intelligent routers become an integrated part of our networks, and basically all our products will work on the same technology platform. That’s why cooperation isn’t a strong way forward. We have to have it in-house.”

When asked if Ericsson would enter the core router market any time soon, Bjorn Olsson, executive vice president and general manager of Ericsson’s Business Unit Systems, pointed out that Redback’s edge routers are large enough to be used as core routers in some smaller carrier networks and mobile networks. DeNuccio added that core router functionality was a subset of edge router functionality, arguing that Redback had already “licked” the hardest part of designing router platforms.

Ericsson made an aggressive move into wireline networks with its 2005 acquisition of Marconi’s wireline business. Ericsson’s bid for Redback is “the opposite” situation from its Marconi acquisition, Svanberg said. “Marconi was a company in crisis that needed to be restructured. [Redback] is a company positioned for strong growth.”

Ericsson also bid on carrier Ethernet equipment vendor Riverstone Networks in March but was outbid by Lucent Technologies. “Having done this [Redback offer], I don’t think we miss Riverstone,” Svanberg said today. “You can only do so much integration at one time.”

Svanberg also pointed out that, while Ericsson evaluates possible acquisition targets, the company develops internally the products it thinks it will need going forward. “It’s not as though we’re announcing a long row of acquisitions here,” he said. “That’s not my intention.”

“There are still products and applications we need,” he added, “But from a technology point of view, we are complete.”

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© 2014 Penton Media Inc.

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