Ericsson inks record deal with US$6.2b Vonage takeover

[STOCKHOLM] Ericsson has agreed to buy Vonage Holdings Corp in its biggest-ever deal, a takeover that also concludes a brief but successful activism campaign by Jana Partners.

Ericsson's US$6.2 billion all-cash offer for Vonage dwarfs its £1.2 billion (S$2.18 billion) acquisition for Telent Ltd telecom equipment assets in 2005, according to data compiled by Bloomberg.

Jana Partners, which owns about 4 per cent of Vonage, called on the company in August to hire advisers to explore strategic alternatives, including a possible sale of all or parts of the telecommunications services company.

Vonage, based in Holmdel, New Jersey, provides business communications services that run via the Internet. Ericsson's shares fell as much as 4.3 per cent in early trading on Monday, with credit analysts at Danske Bank noting that the price Ericsson is paying for Vonage is "quite steep".

But chief financial officer Carl Mellander said in an interview: "I think we're paying the right price. It's a value that we justify, otherwise we wouldn't do it."

Ericsson will pay US$21 per share for Vonage using existing cash, said a company statement on Monday. The offer represents an equity value of US$5.3 billion, and a fully diluted value of about US$6.2 billion, the statement added.

Ericsson's push into cloud-based services comes as its earnings have been hampered by both lost business in China and component shortages from a global supply-chain squeeze. The company said on Monday that it remains fully committed to its long-term Ebitda margin target of 15-18 per cent.

"We might see more acquisitions and our job is to create value," said Mellander.

The US company's cloud-based communications platform accounts for 80 per cent of its US$1.4 billion annual revenues and enables developers to embed services such as messaging or video into their products. That customer base and developer community is seen as a key draw for Ericsson.

Ericsson's activist owner Cevian Capital AB said it welcomed the company's push to accelerate growth within the enterprise segment, enabling a "meaningful re-rating opportunity".

Vonage itself had been under pressure from activist investor Jana Partners and was working with advisers to run a strategic review of the business. That review included the possibility of a full sale of the company, Bloomberg News reported in September. "Vonage gives us a platform to help our customers monetise the investments in the network, benefiting developers and businesses," said Ericsson's chief executive officer Borje Ekholm.

BLOOMBERG