Telefonaktiebolaget LM Ericsson on Tuesday said it agreed to buy parts of struggling telecommunications equipment vendor Marconi for £1.2 billion ($2.1 billion).
As wireless networks continue to boost data throughput rates, the back-end supporting wired networks must continue to grow, said Carl-Henric Svanberg, president and chief executive officer of Ericsson. With this acquisition, Ericsson will be able to supply the equipment that can help operators increase capacity on their wired networks.
As part of the deal, Ericsson will get Marconi's optical networking equipment, broadband access products, and softswitch products as well as research and development operations. Ericsson is also buying Marconi's radio access business. Combined, the parts of Marconi that Ericsson is buying account for 75 percent of Marconi's income. Ericsson is also acquiring the Marconi brand.
Ericsson expects that the acquisition will add £1 billion in sales but likely won't positively affect Ericsson's bottom line until 2007.
Marconi's remaining services business will be renamed Tenet and will operate independently of Ericsson. The business offers services such as network support and installation to operators and large enterprises, mainly government and transportation entities. The company will retain 2,100 employees.
Ericsson expects to cut 15 percent to 20 percent of the workforce that it acquires.
Some of the acquired Marconi products will overlap with products Ericsson already makes. Both companies make softswitches and digital subscriber line access multiplexers said John Marcus, an analyst with Current Analysis.
Part of the acquisition will include Marconi's data networking business that is based in the U.S. The business could be valuable to Ericsson because of its lucrative government contracts, Marcus said.
Marconi, which is based in London, has struggled recently and recorded a notable setback when it lost the contract earlier this year to upgrade a network for British Telecom, one of its biggest customers. Ericsson, however, did win a piece of that contract although it would have had to rely on partners to supply some of it, said Rogier Mol, senior research analyst for voice over IP infrastructure in Europe for IDC. "At that time, Ericsson was lacking the resources to contribute to the project to implement the hardware infrastructure and services," he said. "This is also one of the reasons why Marconi is such a good strategic fit."
Ericsson, based in Stockholm, wouldn't comment on if it will use Marconi products to fill the BT contract, however. "We would have delivered anyway so this is not significant for the BT contract," said Svanberg.