Swedish equipment maker Ericsson’s news last week that its third quarter 2016 earnings would be significantly lower than expected, coupled with its recent ousting of CEO Hans Vestberg in July, paints a dismal picture for the equipment maker. However, analysts queried by SDxCentral don’t believe the company’s financial troubles will impact its partnership with Cisco or make the company an acquisition target, at least not yet.
Last November, Cisco and Ericsson announced a partnership in which the two would work jointly on Internet infrastructure, cloud, and wireless network products. At the time, the companies said that the partnership would generate $1 billion in revenue for each side by 2018.
Ericsson warned last week that its third quarter 2016 earnings would lower than expected and blamed its hard times on weaker demand for mobile broadband along with a tepid macroeconomic environment.
The company, which reports its third-quarter earnings Friday, said its third-quarter sales declined by 14 percent year-over-year to 51.1 billion Swedish kroner ($5.6 billion).Gross margin declined in the quarter to 28 percent from 34 percent in the same quarter 2015. Operating income saw the most drastic drop, down 93 percent compared to the third quarter of 2015.
Despite that, analysts think it’s unlikely Ericsson’s troubles will prompt Cisco to consider morphing the partnership into an acquisition.
“It’s conceivable, but I think it would be a silly move,” said Phil Marshall, analyst with Tolaga Research. “Cisco has a lot to do to transform its business into a software company. And Ericsson has to transition and get more diversity in their senior management. Combining the two without making those changes would not solve the problems they have.”
Marshall added that Cisco tends to make smaller acquisitions. And in this type of a large acquisition, you would want a strong dominant player pulling in a weaker player. He said that’s just not the case with these two firms.
Plus, any company that might consider acquiring Ericsson would likely have difficulty, said John Byrne, an analyst covering service provider infrastructure at Current Analysis. “Culturally, they are still a very Swedish company from the management to the board. I don’t see that changing.”
However, Byrne added that if the company continues to struggle and its cost and efficiency program (the company’s plan to streamline its manufacturing and reduce headcount in order to save an estimated $1.05 billion by year-end 2017) doesn’t help it turn things around, then it may be a clear acquisition target.
Nevertheless, SDxCentral VP of Research Scott Raynovich predicted last November, when the Cisco and Ericsson partnership was announced, that the two companies would eventually merge to save costs and further align their product portfolios.
CEO Search Continues
Meanwhile, Ericsson’s search for a new CEO continues. Interim CEO Jan Frykhammar, the former CFO of the company, has said he doesn’t want to stay in the job permanently.
Earlier this week, Swedish business daily Dagens industri reported that several candidates have declined the job. And Bloomberg reports that Ericsson’s biggest shareholder, Investor AB, has been pressuring the company to find a replacement quickly.