Ericsson are acquiring Vonage for USD 6.2 billion to spearhead, what it says is, the creation of a global network and communication platform for open innovation
“The core of our strategy is to build leading mobile networks through technology leadership. This provides the foundation to build an enterprise business.” Börje Ekholm, President and CEO of Ericsson
So what does this mean?
It signals a greater direct push into the Enterprise market for Ericsson; a market that it has, to date, avoided selling directly too. With the VCP portfolio Ericsson acquires 120,000 customers. Growth of Vonage recently has been flat to single digit range and free cash flow is 8% of total sales (USD 1.4 Billion). VCP is 80% of total revenue. The deal won’t be accretive to EPS for Ericsson until 2024 at earliest. Jana Partners actively pushed for the sale.
Merger success will require changed thinking in Ericsson
With today’s announcement it’ll be interesting to see the ability of Ericsson to execute on this merger.
The two companies have very different cultures and business models which need careful alignment, if they are not to destroy the value of the merger. Vonage is a direct to enterprise software company being a acquired by a what is still fundamentally a hardware company with a CSP channel to the enterprise market.
The withdrawal from enterprise edge with the closure of Edge Gravity and the more historic merger with Telcordia Technologies point to how this can potentially go wrong. Ericsson need to get the fundamentals right if they are to succeed in using this acquisition to gain a better foothold in the enterprise network market.
Long term plan?
Many aspects of Vonage’s core market in SIP/voice are increasingly legacy or commoditised by “Over the top” hyper scale applications. Ericsson will both have to operate this “legacy” efficiently but at the same time invest in developing its platform beyond this commoditised market.
For more analysis on the Ericsson/Vonage acquisition, see our Research Note.