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December 20, 2006

Ericsson pays $2.1bn for Redback to build IP product range

LM Ericsson Telefon AB is paying $2.1bn in cash for edge router specialist Redback Networks Inc, and will use the company's platform in a bid to exploit the explosive growth in triple-play demand by becoming a major force in IP telephony.

By CBR Staff Writer

CEO Carl-Henric Svanberg was tight-lipped about future acquisitions, but further deals are inevitable to fill out the company’s product line and complete what he described as the IP-fication of Ericsson.

Redback emerged from bankruptcy in 2004 but has shown revenue growth of more than 90% in its last two quarters and has outperformed its main competitors Cisco Systems and Juniper Networks. It is however coming from a long way behind, and with Cisco accounting for more than half the market, Redback’s share is only between 6% and 7%.

Ericsson justified the cost of the acquisition, which falls to $1.9bn when Redback’s cash reserves are taken into account, by saying the San Jose, California-based company had spent $500m developing its platform which will save it considerable investment developing its own routers.

It said Redback, which had sales of $192m in the first three quarters of this year, currently addresses a $1.7bn slice of an IP edge market worth a total of $3.6bn. But by expanding the product range of the combined company, it believes it will compete in a $4.1bn section of a $5bn market by 2009.

Svanberg said the pace of IP deployment is accelerating as operators move to all-IP converged networks which require increasingly intelligent routers with higher capacity. He said the combination of Redback’s routing technology and its own IP Multimedia Subsystem, optical transport, and broadband access puts it in a leading position, with end-to-end IP systems for both fixed and mobile operators.

Though the market is in its infancy, both companies emphasized that carriers are making decisions now and it is essential than they win business with carriers who are increasingly switching the proportion of capital expenditure to IP-based equipment.

Ericsson resells Juniper equipment, and while Svanberg said he hopes the relationship will continue, it will inevitably be a victim of the expansion of Ericsson’s product line.

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The acquisition continues a consolidation in the telecoms equipment sector that now looks likely to accelerate as carriers prepare for a burst of spending on IP networks. Ericsson made its first significant move from wireless into fixed-line equipment in 2005 with its $2.1bn purchase of the telecoms business of Marconi Plc.

Since then, prompted by big mergers amongst carriers in the US, Alcatel has bought Lucent, while Nokia plans a merger with the fixed-line business of Siemens. Behind it all, the industry is heading toward a huge convergence of fixed and mobile all IP networks, offering a whole range of data and TV services.

Ericsson is paying $25 for each Redback share, a 17.86% premium on Tuesday’s closing price. It expects the deal to it to be slightly dilutive to earnings in 2007 but accretive, before exceptionals, in 2008.

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