Ericsson/Nortel:  A decade ago, Ericsson and Nokia were the biggest opponents of the wireless CDMA standard. After all, they were trying to get telecoms operators hooked on their equipment, based on the GSM standard. So why did Sweden’s Ericsson to trump the Finnish firm to buy bankrupt Nortel’s declining CDMA business for $1.13 billion? Turns out, controlling the past may be a way to control the future.

Wireless infrastructure companies are by necessity, always thinking of the next generation of equipment. Bet on the wrong horse, and you are doomed to declining sales as operators replace aging gear. This is essentially the position of Nortel’s wireless business. Its revenues were about $2 billion last year, but they are declining sharply. They may shrink about 30 percent this year according to JP Morgan research.

But even a declining business is worth something if it can be harvested for cash, as this one can be. Ericsson won’t have to invest much of anything to run the Nortel unit. In the meantime, equipment in the field isn’t replaced all at once and needs to be serviced. It might take a decade until all Nortel’s CMDA business is phased out. With operating margins at around 15 percent, Ericsson could recoup its investment.

Of course, earning your money back isn’t a very enticing reason for a merger. But it is if the price gives you a kicker. Telecom customers will eventually switch to a new standard called LTE, which Ericsson has had a large hand in developing. Happily, Nortel has been working on the standard too, and Ericsson will acquire some patents and 400 engineers working on the new standard. Moreover, operators that currently use CDMA will be among the first to switch to LTE, because their customers are clamouring for the faster data speed the new standard offers.

Of course, there’s no assurance big US customers like Verizon Wireless and Sprint are more likely to order Ericsson equipment in the future simply because they are Nortel customers. But having a foot in the door must help. Denying rivals like Nokia and Chinese upstart Huawei the same level of contact probably has some value. Ericsson looks smart to have locked up Nortel’s wireless assets.

Context News
Ericsson on Sunday said it won an auction to purchase Nortel’s CDMA telecoms equipment business, agreeing to pay $1.13 billion. Rival Nokia bid $650 million, according to news reports.

Nortel’s CDMA business generated $2 billion of sales in 2008 and a “robust double digit” operating margin, according to Ericsson. The business is in decline, as phone companies switch to more advanced standards.

The purchase also includes patents relating to a “fourth generation” telecom technology called LTE, as well as 400 engineers working on the new standard.


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