Ericsson and Cisco recently announced a strategic partnership that will reportedly bring in $1 billion in incremental revenues for both companies by 2018. While the details of the agreement remain ambiguous, the companies are looking to leverage their expertise in their respective fields to provide better networking solutions amid a rapidly shifting telecom market and rising competition from Huawei and Nokia . Ericsson and Cisco have both been facing some challenges due to a slowdown in the global smartphone market. However, with a partnership, they should be able to offer end-to-end solutions, offsetting the impact of sluggish industry growth.
The partnership is also interesting as it has some characteristics of a merger, but without the regulatory risk or other downsides. Telecom equipment is considered extremely sensitive from the perspective of privacy and security, and a merger would have likely resulted in a lot of antitrust issues. Even with the partnership, there is likely to be some significant government scrutiny. Cisco and Ericsson had been in negotiations for 13 months, and both companies believe that an alliance should strongly benefit them and their customers.
We have a price estimate of $26 for Cisco, which is slightly below the current market price.
We have a price estimate of $12 for Ericsson, which is about a 20% premium to the current market price.
What The Deal Means
Ericsson did not explicitly mention the details of the partnership with Cisco. Rather, it laid emphasis on what each company brings to the table. Ericsson mentioned that Cisco’s leadership position in IP and strong position in enterprise will complement Ericsson’s leadership position in mobile networks, strength in global services and strong customer relationships globally. The partnership will start with a focus on service providers, and will subsequently move on to the enterprise segment, and will also focus on accelerating the scale and adoption of Internet of Things (IoT) services across industries. In addition, engineers from both companies will collaborate and develop technologies focused on SDN/NFV (software defined networking/Network Functions Virtualization) and network management and control. In a nutshell, Ericsson and Cisco will combine consulting efforts and sales in certain areas, and pool resources to jointly develop new hardware and services.
How The Deal Helps Cisco
Ericsson and Cisco have faced some challenges in their respective arenas over the past couple of years. Sluggish capital spending by telecom carriers on network upgrades and expansion have impacted the telecom gear and networking spaces. Cisco’s share in the global routing and switching markets has been declining consistently on account of growing competition from white label hardware and SDN companies. Through this deal, Ericsson will reportedly sell Cisco’s products globally and offer managed services to allow quick integration of the networking company’s gear. Initially, Ericsson will look to sell Cisco gear to its existing customers such as AT&T T +0.00%, Verizon and Vodafone , and ultimately pitch complete solutions together to new customers. By pushing its bundled products through Ericsson, Cisco gains a geographical advantage. Ericsson’s business is spread over 180 countries, which potentially opens up an incremental revenue opportunity for Cisco. Ericsson’s vast reach, along with the companies’ combined efforts to develop SDN tech can help Cisco effectively fend off competition from rivals such as Juniper.