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Ericsson’s $6.2bn Acquisition of Vonage

By Martin Palomar, Dorian Song, Théo Leleup, and Tom Bendinelli (HEC Paris), and Michele Bolognesi, Luca Introna, Andrea Zenoniani, Miki Borowiak, Edoardo Borsoi, and Sonia Andrzejuk (Bocconi)

Photo: Sander Weeteling (Unsplash)

 

Overview of the deal


Acquirer: LM Ericsson AB

Target: Vonage Holdings

Implied Equity Value: $5.3B

Total Transaction Size: $6.2B

Announced date: 22 November 2021

Expected completion date: 30 June 2022


On the 22nd of November 2021, Ericsson announced its acquisition of all of Vonage’s outstanding shares with an all-cash transaction for a total equity value of $5.3B.


The offer price of $21 represents an announced bid premium of 28.3%, based on Vonage's closing share price of $16.37 on the 19th of November 2021 (the last available trading day before the announcement).


Vonage Holdings, a New Jersey-based online cloud communications hosting services provider, and its presence in the Communication Platform as a Service (CPaaS) segment will provide Ericsson with an opportunity to access this complimentary market that is expected to reach $22B by 2025, growing at 30% annually.


Overall, the transaction will be accretive to Ericsson’s EPS and free cash flow from 2024 onwards and deliver near-term revenue synergy opportunities, including white-labeling and cross-selling of the combined product portfolio estimated to contribute $400M by 2025. Ericsson also expects to achieve some cost efficiencies following the completion of the transaction.


“The acquisition of Vonage is the next step in delivering on that strategic priority. Vonage gives us a platform to help our customers monetize the investments in the network, benefitting developers and businesses” - Börje Ekholm, President and CEO of Ericsson

Company Details (Telefonaktiebolaget LM Ericsson)


Telefonaktiebolaget LM Ericsson, together with its subsidiaries, is one of the leading providers of communication infrastructure, services, and software solutions to telecom and other sectors. It operates through four segments: Networks, Digital Services, Managed Services, and Emerging Business.


Founded in 1876, headquartered in Stockholm, Sweden.

CEO: Börje Ekholm

Number of employees: 102,203

Market Cap: $34.491B (as of 03/12/2021).

EV: $31,66B

LTM Revenue: $ 25,26B

LTM EBITDA: $4,01B

LTM EV/Revenue: 1.25

LTM EV/EBITDA: 7.90


Company Details (Vonage)


Vonage is a company that is trying to redefine the telecommunication services sector. It provides unified communications, contact centers, and programmable communications APIs, built on the world’s most flexible cloud communication platform to make communication more flexible, intelligent, and personal.


Founded in 2020, headquartered in Holmdel, New Jersey, United States

CEO: Rory Read

Number of employees: 2,198

Market Cap: $5.22bn (as of 27/11/2021)

EV: $5.68 bn

LTM Revenue: $1.37 bn

LTM EBITDA: $0.121 bn

LTM EV/Revenue: 4.15

LTM EV/EBITDA: 47.05


Projections and Assumptions

Short-term consequences

Vonage’s acquisition is consistent with Ericsson’s current strategy that involves expanding globally by increasing its presence as a cloud-based solutions provider. The deal is another step towards fostering the firm’s vertical integration, already initiated by the acquisition of Cradlepoint, a US-based wireless networking company purchased by the Swedish telecom back in 2020 and has continued to develop robustly under Ericsson’s ownership.


Through this acquisition, Ericsson will foster its growth by expanding the range of wireless and cloud-based solutions currently available in its offer. According to the company's management, the newly formed entity will have promising potential to reach its existing customers with complementary products and services. As Vonage’s developer ecosystem will gain access to 4G and 5G network APIs, it will better monetize its investments by creating new API-driven revenues. Upon completion, Vonage will become a wholly-owned subsidiary of Ericsson and continue operating under its existing name. Its CEO, Rory Read, will join the Executive Team of Ericsson and its 2,200 employees based throughout the United States, EMEA, and APAC, and is expected to stay with the company.

From a financial standpoint, the transaction is expected to be accretive to Ericsson’s EPS and free cash flow only from 2024 onwards; nonetheless, Ericsson will have an opportunity to capitalize on 120,000 Vonage customers and its registered developers that are estimated to number more than one million people globally. In the near term, the synergy is expected to bring in additional revenue of USD 0.4 billion secured by cross-selling and white-labelling its combined product portfolio.


Long-term Upsides


This acquisition will enhance Ericsson’s independence, as the Swedish company will have greater control over its supply chain. Through its expansion in wireless enterprise and enterprise digitalization, Ericsson will also reduce its exposure to the very cyclical telecommunication sector.


By investing in a fast-developing sector, Ericsson implies it will turn itself toward (open-)innovation and hopes to position itself as a leader of API development. With Ericsson’s backup, Vonage may well prove a good competitor for the services provided by the GAFAM, all the more so since their Voice over Internet Protocol (VoIP) services such as Skype and Google Hangouts are not exactly very successful right now. In a way, this market does not have a dominant actor yet. Thus, this acquisition will probably broaden the possibilities for customers and possibly cut the prices down.


In addition, Ericsson is also seizing the chance left by Huawei’s troubles in the Western markets. With Ericsson’s 5G services, Europe may well have found its ideal partner, neither linked to the Chinese government nor the American GAFAM. However, Ericsson and Vonage are still behind their American (Cisco, Zoom) and Chinese competitors (Huawei), so they will have to catch up to them although the two firms only have limited synergies.


Risks and Uncertainties

Ericsson‘s $6.2 billion acquisition of Vonage immersion in an unknown competitive market creates significant risks. With Ericsson’s share price down following the news, the market doesn't look excited by the company's largest deal ever. The reaction from the general public is mixed and some suggest that the company might be making “a bold move that might not work”. According to Jon Arnold, principal of J Anrold & Associates, this could be another example of how this industry is being shaken up.

“5G has been a fantasy; it’s been a promise for a very long time. And there are a lot of companies that are heavily invested in this technology, and it’s only going to be successful if they can drive applications and use cases at the other end. You can build the best infrastructure in the world, but it’s not going to be of much interest if no one is going to use the services. And they’re not the only vendor that thinks like that,” he said.

Still, it seems like Ericsson has an interesting long-term plan for the combined entity that involves integrating 5G capabilities in Vonage's communication APIs. It also plans to leverage Vonage's large pool of more than one million registered developers to grow an ecosystem of 5G solutions; Vonage's APIs could provide enterprises with an easy way to implement 5G's network-slicing technology, which can be used to prioritize network resources for mission-critical applications over less time-sensitive applications such as email. However, it remains to be seen how Ericcson will monetize that long-term opportunity that could reduce its exposure to the more cyclical telecom industry.


“The convergence of the internet, mobility, the cloud and powerful 5G networks are forming the digital transformation and intelligent communications wave, which is driving a secular change in the way businesses operate. The combination of our two companies offers exciting opportunities for customers, partners, developers and team members to capture this next wave” - Rory Read, CEO of Vonage


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