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Ericsson, the world's largest maker of mobile-phone networks, agreed to buy Redback Networks Inc. for $2.1 billion in cash to gain expertise in IP-routing technology and more directly challenge Cisco Systems.
Redback makes so-called "edge" routers that connect computers to the Internet and allow operators to simultaneously deliver broadband, television and telephone services over networks using standard Internet infrastructure. The technology's essential to carriers that want to offer increasingly popular"triple-play" communications services.
The acquisition will enable Ericsson to bulk up its offering in that arena and help it capitalize on the growing need for phone companies and Internet providers to revamp their networks to handle the massive bandwidth requirements of these services - in particular, video.
Analysts for CIBC World Markets said the deal will put Ericsson in direct competition with Juniper Networks as well as networking giant Cisco .
Jouni Forsman, a telecoms analyst with technology market research firm Gartner, agreed that the Redback acquisition will pitch Ericsson directly against Cisco in the market for edge technology. He underlined, however, that Cisco's stronghold is in core products, where Ericsson is no threat.
Under the proposed offer, Sweden's Ericsson will pay $25 per Redback share, an 18% premium to Tuesday's closing price.
Analysts welcomed the strategic rationale of the deal, saying it validates the importance of the IP edge router market.
"Ericsson's move emphasizes the strategic importance of the edge network," Gartner's Forsman said.
"Ericsson will now have a very impressive end-to-end portfolio," he added. "It will push the bar on the others in terms of delivering a better end-user experience."
Deutsche Bank said Redback's a solid company, with nine-month sales up 87%. It also noted that the deal will assuage fears that Ericsson may snap up Juniper in a transaction that would be far more dilutive.
Analysts at CIBC said that although the acquisition price "may be a bit on the high side," the deal supplies "a strong addition to Ericsson on the product side and an important strategic asset that makes Ericsson a much stronger player with broad exposure in wireline access and edge equipment."
J.P. Morgan said the deal will benefit Ericsson strategically by giving it access to operators such as AT&T Inc. and BellSouth Corp., which use Redback's routers, in the US. Ericsson may also win over new customers in Europe.
"Redback should bolster its [Ericsson's] chances of winning the confidence of major telcos, such as Telecom Italia, Telefonica, BT Group, Telstra, Deutsche Telekom...," Dresdner Kleinwort analyst Per Lindberg told clients.
Ericsson sees the deal with Redback as "slightly" cutting into 2007 results, mainly due to one-time costs associated with the transaction. Excluding possible non-cash amortization charges, the acquisition is expected to add to 2008 earnings.
Ericsson CEO Carl-Henric Svanberg told journalists on a conference call Wednesday that it was likely cheaper for Ericsson to acquire Redback than to build its own expertise in IP-routing technology.
Redback's management team will stay in place, and the company will operate as a wholly owned subsidiary of Ericsson. Kevin DeNuccio, Redback president and CEO, will report directly to a management board chaired by Ericsson's Svanberg.
"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," DeNuccio said in a statement.
Redback was founded in 1996. A high-flying stock during the dot-com era, it crashed spectacularly when the bubble burst. It has about 800 employees compared to Ericsson's 56,000.
Not everyone stands to gain from the tie-up. The deal will have a two-fold negative impact on Tellabs Inc. , J.P. Morgan analysts said.
The broker cautioned that the combination of Redback's edge-routing platform with Ericsson's carrier relationships will result in a more formidable competitor to Tellabs' 8800 platform and that a potential takeover of Tellabs by Ericsson is now unlikely, given the product overlap.
Meanwhile, CIBC analysts cautioned that Juniper will likely find itself in a weakened competitive position. They said the company faces the choice of selling now or buying bigger and faster, as it grapples with increased competition from Cisco in the core market and from Alcatel-Lucent and Redback at the edge.
They also said the Redback acquisition doesn't necessarily mean the shopping spree is over for Ericsson, noting that carrier Ethernet switching is a hole in Ericsson's current capabilities and an area in which it could make acquisitions.
Other areas where Ericsson could be active include more access as well as services and multimedia applications, the broker said.
Last month saw the completion of the $11.6b. merger between communications-equipment companies Alcatel and Lucent Technologies Inc.
At that time, some observers forecast that smaller networking vendors could consolidate.
Ericsson earlier this year, bought the network-equipment unit of Britain's Marconi for $2.1b. Nokia and Siemens have recently merged their network operations.
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