Ericsson to buy Redback Networks

$2.1 billion deal may fuel Cisco challenge

Plugged In

December 21, 2006|By MarketWatch

LONDON -- Ericsson, the world's largest maker of mobile-phone networks, agreed yesterday to buy Redback Networks Inc. for $2.1 billion in cash to gain expertise in Internet protocol-routing technology and more directly challenge Cisco Systems Inc.

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 is 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 substantial 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 Inc. as well as networking giant Cisco.

Jouni Forsman, a telecommunications 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 percent premium to Tuesday's closing price.

In Stockholm, Ericsson shares rose 1.3 percent yesterday. Shares of San Jose, Calif.-based Redback opened 17.7 percent higher at $24.90. Cisco shares slipped 0.1 percent and Juniper - which was downgraded by CIBC World Markets to sector performer from sector outperformer as a result of the Redback deal - fell 2.3 percent.

Analysts welcomed the strategic rationale of the deal, saying it validates the importance of the Internet protocol edge router market.

"Ericsson's move emphasizes the strategic importance of the edge network," Gartner's Forsman said. "It will push the bar on the others in terms of delivering a better end-user experience."

J.P. Morgan Securities Inc. 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 United States. Ericsson also may win new customers in Europe.

Ericsson Chief Executive Officer Carl-Henric Svanberg told journalists in a conference call yesterday 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.

The deal is expected to close in February and is subject to approval by shareholders and regulators. Holders of 22 percent of Redback's outstanding shares have agreed to tender their stock into the deal.

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