ERIC Ericsson

   (FROM THE WALL STREET JOURNAL 11/10/15) 
   By Don Clark and Jens Hansegard 

STOCKHOLM -- Networking giants Ericsson AB and Cisco Systems Inc. are forging an unusual alliance to better take on a rapidly shifting global market and combat the rise of such rivals as China's Huawei Technologies Co.

The pact, announced Monday, stops short of a full-blown merger but has aspects of one: Ericsson, a leader in wireless equipment, and Cisco, which dominates the market for Internet gear, will work together to integrate existing equipment. They will combine some sales and consulting efforts and, ultimately, may jointly develop entirely new hardware and services.

Both companies are coping with challenges that include a slowdown in the smartphone market, a longtime driver of revenues for the telecom companies that are their biggest customers. They also face heightened competition from Huawei, as well as a new threat created by the pending 15.6 billion euros ($16.8 billion) takeover of Alcatel-Lucent SA by Nokia Corp. Those rivals have expertise in both wireless and Internet technologies, a combination that Cisco and Ericsson hope to now match, said Pierre Ferragu, an analyst at Sanford C. Bernstein.

At the same time, the deal underscores a widening recognition of the downsides of large mergers, particularly cross-border transactions that can face regulatory scrutiny in many countries.

"Neither Ericsson or Cisco really believe that these large mergers typically work," Chuck Robbins, Cisco's chief executive, said in an interview.

Cisco and Ericsson, in negotiations for 13 months, said alliances can bring benefits to companies and customers more quickly. They projected their alliance would add $1 billion or more in annual sales for each company by 2018.

"This is a much more agile and efficient choice," Hans Vestberg, Ericsson's chief executive, said in an interview. "We can start already tomorrow."

Analysts don't expect formal reviews by antitrust authorities, but politicians on both sides of the Atlantic may take a close look. Governments have been eager to closely monitor suppliers of equipment regarded as highly sensitive for security and privacy reasons. Huawei has been essentially shut out of the U.S. market after a congressional report deemed it a risk to national security.

Ericsson, a Swedish company that traces its history to 1876, makes hardware that manages wireless connections, as well as network operations and billing systems. Cisco, a Silicon Valley company founded in 1984, is known for switches and routers that connect computers together and to the Internet.

For Ericsson, the alliance could help retain its position as the world's biggest telecom-equipment supplier by sales, just as its Nordic rival Nokia regains strength. Nokia's takeover of Alcatel-Lucent could create a powerful challenger to both Ericsson and Cisco.

To find new revenues, analysts said, Cisco and Ericsson must develop new products to cope with changes in the networks operated by mobile and wireline carriers -- as well as exploit a trend called the "Internet of Things," which will connect more everyday devices to one another.

The other problem is Huawei, which recently overtook Ericsson in the market for mobile infrastructure equipment, according to analysts at Dell'Oro Group. Huawei received 30% of revenues in that market during the first half of 2015, according to the research firm, compared with 27% for Ericsson and 25% for the combination of Nokia and Alcatel-Lucent.

Meantime, Ericsson's core business of supplying equipment has suffered from price competition and from the relatively slow rollout of broadband wireless networks, known by the acronym 4G, by its carrier customers.

Cisco also faces pressure from Huawei. Dell'Oro estimates that the Chinese company accounts for 13% of the global router business -- Cisco has 49% -- but Huawei has displaced Cisco as No. 1 in China.

Technology changes at telecom carriers are equally important. "These service providers are looking to build their networks in a different way," said Chris DePuy, a Dell'Oro analyst.

For one thing, telecom carriers are using computers equipped with software for some of their key operations rather than buying special-purpose equipment.

Those combinations, which Cisco is working to deliver, are likely to be increasingly integrated with the kind of gear for managing billing and operations that Ericsson specializes in, Mr. DePuy said.

"That is one of the first things that is going to bring value to the operators," Mr. Robbins said.

In the short term, one benefit of the alliance is for Ericsson to resell Cisco networking gear. The Swedish company also has 65,000 service personnel that help advise carriers on how to build networks. Cisco, which has 11,000 service workers, can take advantage of the Ericsson staff, Mr. Robbins said.

Ericsson, which has around 116,240 employees, reported revenue last year of 228 billion Swedish kronor ($26.3 billion). Cisco, which employs 70,000 people, reported revenue of $49.2 billion in its latest fiscal year, which ended in July.

The companies sell some competing equipment, but the overlap is small. Cisco accounted for 1% of the wireless infrastructure market in the first half, while Ericsson accounted for 1% of the routing market, Dell'Oro estimates.

An added wrinkle of the partnership concerns patents. Ericsson, a wireless pioneer, claims 37,000 patents to Cisco's 19,000. The companies said they expected to complete a patent cross-license agreement under which Cisco would pay an unspecified amount to Ericsson for use of its patents.

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(END) Dow Jones Newswires

November 10, 2015 02:48 ET (07:48 GMT)

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