Ericsson in major US broadband deal

Swedish telecoms equipment maker Ericsson has agreed to buy American company Redback Networks for $2.1 billion.

Redback, based in San Jose, California, makes routers used to direct data over broadband networks. The deal is expected to be completed in early 2007. Redback’s management team will stay in place, and the company will operate as a wholly owned subsidiary of Ericsson.

Ericsson CEO Carl-Henric Svanberg said in a statement the agreement “accelerates Ericsson’s ambition to build leadership in the fast growing broadband and IP services market.”

Redback has about 800 employees, and its Chief Executive Officer Kevin DeNuccio said no layoffs were planned.

“This is not about cost synergies, this is about growth,” he said.

By comparison, Ericsson has about 56,000 employees and a market capitalization of about $64.5 billion, compared with Redback’s market cap of about $1.5 billion.

DeNuccio said the deal will allow both companies to capitalize on the need of Internet providers and telecom companies to revamp their networks to handle the massive bandwidth requirements of those services.

“It’s a huge market for the routing technology necessary to build out these networks, and it’s really video driving the need for the infrastructure changes,” he said in an interview. “I don’t view this as an ending, I view it as a perfect match of the key technologies that will be necessary in the future.”

Ericsson is paying about $25 per Redback share, an 18 percent premium over Redback’s closing price of $21.17 on Tuesday on the Nasdaq Stock Market.

The deal was announced after the market closed, and Redback shares gained more than 17 percent, or $3.63, in after-hours trading to $24.80.

Ericsson shares were up 4 cents to $40.66 in after-hours trading on the Nasdaq.

Analysts said both companies stand to profit from the deal.

Redback can tap into Ericsson’s vast resources and customer base to help increase market share. Meanwhile, Ericsson gets to own and sell a crucial piece of technology that service providers need to intelligently differentiate between types of data and route them appropriately in increasingly complex networks.

In the latest quarter, Redback held about 6 percent of the worldwide market for Internet Protocol edge routers, according to Infonetics Research.

Redback ranked fourth on the list behind much larger rival Cisco Systems Inc., which led the pack with 51 percent, and Alcatel-Lucent and Juniper Networks Inc., which both were in the mid-teens.

The total market for that type of equipment is expected to be around $4.1 billion for 2006 and is forecast to grow to $5.8 billion by 2009, according to Infonetics.

“Size does matter in this industry, and I think this is a good match for both companies,” said Michael Howard, an analyst with Infonetics. “Certainly it’s a good match for Redback because Ericsson is huge. And for Ericsson, it’s smart for them to own the IP edge routing technology themselves.”