Marconi gives Ericsson convergence power

Ericsson agreed to acquire Marconi’s telecom equipment business for 1.2 billion pounds (or about $2.1 billion), the company announced today.

The Swedish equipment vendor will purchase five units that contribute about 75% of Marconi’s total revenue: optical, softswitch, data networking and services, broadband and fixed wireless access and telecom services. Marconi’s remaining business will become a professional services firm known as “Telent.”

The addition of these fixed-line business units, which include DSL and Ethernet technologies, gives Ericsson, a leading wireless supplier, a formidable stance in the growing area of network convergence.

“With the acquisition, Ericsson will own a set of technologies that is used more and more as a backhaul technology for mobile networks,” said Jean-Charles Doineau, Ovum-RHK research director, in a statement issued today. “This is a very smart move when we are talking about 1 Mb/s HSDPA access in UMTS networks.”

Outside a convergence strategy, the acquisition would be less appealing, Doineau said. “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.”

In addition, Marconi’s softswitch business may be redundant with Ericsson’s own existing softswitch line. And Marconi’s ATM business, principally built on U.S. military customers, would be a precarious one for Ericsson to maintain.

Marconi’s acquisition has been anticipated since at least April, when it failed to win inclusion in British Telecom’s 21st Century Network initiative. As Marconi reeled in the months that followed, Chinese equipment vendor Huawei Technologies was among those rumored to be eyeing Marconi’s assets.

“From Marconi's point of view, it is probably the best deal the company could have hoped for,” Doineau said. “Much of its expertise and R&D resources will move over to Ericsson, the services arm will remain as a separate ongoing interest with £300 million 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.”

Today’s announcement could be somewhat bad news for Marconi’s competitors in the optical equipment space, since it replaces an ailing Marconi with a powerful Ericsson. Alcatel in particular may feel the effects, according to UBS, since Ericsson’s global presence will augment Marconi’s strong European one.

In this year’s second quarter, Marconi took about 6% of the worldwide market for optical networking equipment, according to Ovum-RHK.

Over time, the deal may also threaten Tellabs and Ciena, whose SDH and metro Ethernet gear, respectively, is resold by Ericsson today but may be replaced eventually in favor of in-house alternatives. In the company’s third-quarter conference call this morning, Tellabs chief executive Krish Prabhu said he believes the three Tellabs products Ericsson resells are complementary to Marconi’s portfolio.

Down the road, Prabhu said, “It’s quite conceivable that Ericsson will introduce products that are more vertically interacted. We’ll be prepared for that.”

In a note issued this morning, UBS predicted the acquisition would not affect Ericsson’s important role in reselling routers from Juniper Networks, contributing 5% to 10% of Juniper’s revenue. “Although Ericsson is buying Marconi's data networking business, Marconi's portfolio is more ATM-centric with little success penetrating the service provider market, in our view,” UBS said. “We believe Ericsson is unlikely to revive Marconi's router initiative.”