TORONTO — Swedish wireless equipment maker LM Ericsson could nearly double its North American revenues and add 2,500 employees to its workforce with the purchase of Nortel Networks’ profitable and stable wireless business for US$1.13 billion.
The Stockholm-based company and Nortel announced the all-cash purchase early Saturday. The transaction covers Nortel’s older CDMA technology, as well as newer long term evolution, or LTE, wireless businesses of the insolvent Canadian company’s Carrier Networks unit.
In 2008, Ericsson’s North American business generated around US$2.7 billion of sales. The Swedish cellphone and network equipment giant said Nortel’s North American CDMA operations, produced ”robust profitability from a good product mix” and generated US$2 billion of revenue last year. In a weekend statement from Stockholm, Ericsson said it ”acquires an installed base and a healthy business that provides major operators CDMA technology and support services.
In addition, the acquisition strengthens Ericsson’s ability to serve North America’s leading wireless operators in the evolution to LTE.”
“The acquisition significantly expands Ericsson’s footprint in North America, particularly as this region is emerging as an early adopter of LTE technology.”
Ericsson CEO Carl-Henric Svanberg said the acquisition would add 2,500 employees to his company, of which about 400 are focused on LTE research and development. More than a third of the 2,500 jobs in the division are in Ottawa, where Nortel employs about 1,000 people.
“Acquiring Nortel’s North American CDMA business allows us to serve this important region better as we build relationships for the future migration to LTE,” he said.
Some jobs are expected to be cut in the wake of the transaction, but both companies have said they want to preserve as much employment as possible in the Nortel division being acquired by Ericsson.
“Going forward, research and development costs are expected to be relatively low in CDMA compared with other technologies,” Ericsson said.
Nortel placed its wireless business up for auction behind closed doors in New York City on Friday, and international tech industry titans submitted their best offers for the prized division.
Nortel, a former telecommunications equipment powerhouse, sought bankruptcy protection from creditors in January and the auction was planned after the company said it planned to liquidate its operations and sell off its parts piece by piece.
The deal is subject to approval by bankruptcy courts in Canada and the United States on Tuesday and government regulatory authorities in both countries.
Under the transaction, Ericsson will get CDMA contracts with North American operators such as former parent company Bell Canada (TSX:BCE), Verizon, Sprint, U.S. Cellular, and Leap, as well as LTE assets, and certain patents and patent licences relating to CDMA and LTE. CDMA, or code division multiple access, is a rival standard to the dominant cellular standard GSM, or global system for mobile, while LTE, or long-term evolution, is a next-generation wireless network technology that promises to be much faster and allows cellphone operators to stream video and other advanced services on their devices.
Ericsson said that including its recent services agreement with Sprint, Saturday’s deal will make North America the company’s largest operating region, with around 14,000 employees.
The 133-year old Swedish company operates in 175 countries and has a global workforce of 75,000 people.
Ericsson expects the acquisition to have a positive effect on its earnings within a year after closing, the company said.
Magnus Mandersson, currently head of Ericsson Northern Europe, has been named president of Ericsson CDMA operations, and Richard Lowe of Nortel the chief operating officer.
“Our two companies share a long-standing commitment to technological excellence and innovation, and we look forward to welcoming the Nortel employees into Ericsson,” said Mandersson. “We are truly impressed with their continuing outstanding performance during these challenging times.”
Added Lowe, Nortel’s president of Carrier Networks: “The agreement with Ericsson provides a strong and stable future for Nortel’s CDMA and LTE business. Customers will enjoy continued strong support from an industry leader as they look to evolve to LTE. Many employees will also have the opportunity to continue their work with Ericsson, bringing their innovation power and creativity to the wireless industry for years to come.”
In a separate statement, Nortel said it would “work diligently” with Ericsson to close the sale later this year. It also said it would stay focused on finding the right buyers for its other businesses.
Those include a division that makes phones and other telecom equipment for businesses and another which provides network technology and infrastructure.
Nortel employs about 25,000 people overall at its wireless, phone equipment and network infrastructure units.
Despite the Ericsson guarantees it will take on 2,500 Nortel employees, it’s possible there will be some job cuts in Canada, likely in Ottawa and at Nortel’s head office in the Toronto area. In a rival bid for the wireless division announced last month, Finnish-German company Nokia Siemens Networks had guaranteed about 800 Canadian jobs.
Mike Zafirovski, Nortel’s president and CEO, applauded Ericsson’s successful bid, saying the deal “represents a very positive prospect for our customers who will be able to continue their relationships with a long term partner; for employees who will have new opportunities at Ericsson and for many of our other stakeholders.”
So far, the biggest objections have come from BlackBerry-maker Research In Motion (TSX:RIM), which wasn’t part of Friday’s official auction, but made an informal US$1.1 billion bid.
The company was shut out when it objected to Nortel’s bidding process, though it promised to continue its fight for the assets.
Some have speculated that RIM may try to partner with the winning bidder before the wireless sale closes later this year.
Nortel could face further challenges from the federal government over concerns about foreign ownership, or any other bidder or stakeholder who considered the auction to be unfair.
Toronto-based Nortel was once North America’s biggest maker of telephone gear, but was battered by the recession and a downturn in its market that derailed a restructuring effort begun by Zafirovski when he was hired away from Motorola Inc. (NYSE:MOT) four years ago.
Since its peak a decade ago, Nortel’s workforce has shrunk from about 96,000 to 25,000 and the company lost tens of billions of dollars. Besides its telecom market woes, the company was also dragged down by an accounting scandal that nearly wiped out its stock price and led to criminal fraud charges against its former CEO and other executives.
In an industry that saw rivals Alcatel and Lucent consolidate and new Asian competitors eat into its markets with lower-cost equipment, Nortel stayed independent but couldn’t survive as a stand-alone company.