Ericsson buys Redback for $2.1bn

Ericsson, the Swedish telecommunications equipment manufacturer, has offered to acquire Redback Networks, the US network equipment company, for $2.1bn in cash, its largest deal since acquiring Marconi of the UK for just over $2bn in 2005.

Redback is a maker of broadband network routers and the proposed purchase accelerates Ericsson’s ability to provide internet protocol technology, which allows for the delivery of telephone calls, television and broadband services via the internet.

These services are becoming increasingly popular as operators offer customers so-called triple play packages that involve access to telephone, TV and broadband services in one subscription.

Carl Henric Svanberg, Ericsson’s chief executive, said in an interview that today’s proposed move was part of the “IP-fication of Ericsson”.

Existing traffic is delivered over four networks – wireless, wireline, data/IP and TV – but will converge into one all-IP network in future.

According to Ericsson, traffic on fixed networks will be driven by internet usage and internet protocol television and is expected to grow from a combined 25,000 petabytes today to over 250,000 in 2011.

The market for broadband network routers is dominated by Cisco Systems of the US. Ericsson’s proposed acquisition will allow Redback to compete more aggressively with Cisco as it gains access to the Swedish company’s global operations.

Independent analysis indicates Redback has a share of around 6 per cent of the worldwide market for edge routers, far below Cisco with 51 per cent, and Alcatel-Lucent and Juniper Networks, which are both in the mid-teens.

The total market for this type of equipment is around $4.1bn this year but forecast to grow to $5.8 billion by 2009.

No figures were available for Redback’s anticipated growth, but Mr Svanberg drew attention to the fact it has developed its routers more recently compared to Cisco and they were, as a result, quicker and more advanced.

The proposed deal forms part of the ongoing consolidation of the network equipment industry following the merger of Alcatel and Lucent and the proposed merger of the equipment units of Finland’s Nokia and Siemens of Germany.

Ericsson has offered $25 in cash, an 18 per cent premium to Redback’s closing stock price of $21.17 on Nasdaq on Tuesday.

Redback is based in San Jose, Califonria, and was founded in 1996 and listed on Nasdaq in 1998.

The move accelerates Ericsson’s internet protocol technology by giving it access to the technology that allows for the delivery of telephone calls, television and broadband services via the internet.

Ericsson will pay $25 in cash, an 18 percent premium to Redback’s closing stock price of $21.17 on Nasdaq on Tuesday. Redback’s shares has surged 51 per cent this year on hopes of further consolidation in the router sector.

At the open in Stockholm Ericsson’s shares rose as much as SKr0.55, or 2 per cent, to SKr28.1.

The acqusition is Ericsson’s largest since it acquired Marconi of the UK for just over $2bn in 2005.