STOCKHOLM/LONDON Mobile network gear maker Ericsson is to spend $1.15 billion in cash to buy U.S. group Telcordia to help it manage an explosion in data and services and fend off tough competition.
Ericsson Chief Executive Hans Vestberg has said he expects 50 billion devices to be connected to the Internet by 2020, bringing a huge challenge for operators and systems providers.
Ericsson said in a statement on Tuesday that the agreement to buy the Piscataway, N.J. company would lead to 2,600 employees being transferred to it. Telcordia is being sold by Providence Equity Partners, LLC and Warburg Pincus.
"We will definitely be a leader in many of the different domains here," Vestberg told Reuters, adding that the market where Telcordia was active was very fragmented.
"We see this as one of the areas which has portfolio momentum," he added. Ericsson shares were up 1.7 percent at 88.70 crowns after the news.
The Swedish group said the market for software and systems integration was valued at about $35 billion and was expected to show a compound annual growth rate of between 6 to 8 percent between 2010 and 2013.
"The importance of operations and business support systems will continue to grow as more and more devices are connected, services become mobile and new business models for mobile broadband are introduced," Vestberg said in the statement.
"In this context, Telcordia brings very skilled people and knowledge, a large business in North America and other markets, as well as a good multi-vendor product portfolio."
Ericsson said it expected the transaction to close in the fourth quarter of this year with full effect from the first quarter of next year.
It expected the transaction to be accretive to Ericsson earnings per share within 12 months after closing.
"It should help boost the attractiveness of their services offering and make it more difficult for the likes of Huawei or ZTE to break in. Ericsson is looking increasingly strong in this area," said Richard Windsor, global technology specialist, at investment bank Nomura.
"The big question is whether or not Ericsson has overpaid. They have a history of doing so, for example in the cases of Marconi and Redback," he added.
Evercore Partners advised Ericsson in the deal and Paul, Weiss, Rifkind, Wharton & Garrison LLP acted as their legal adviser. Credit Suisse was the financial adviser to Telcordia and Willkie Farr & Gallagher LLP was their legal counsel.