Swedish telecoms equipment giant LM Ericsson Telefon has confirmed market expectations with the news that it is to purchase the majority of the assets and the name of moribund UK telecoms equipment manufacturer Marconi. Following its recent struggles, which included losing out on a major contract with BT Group, Marconi no doubt hopes the acquisition will help improve its prospects.
Under the terms of the deal, Ericsson is to pay GBP1.2 billion ($2.14 billion) for approximately 75% of Marconi, which translates to most of its telecoms equipment business. The price includes up to GBP700 million ($1.25 billion) that the UK pensions regulator said Marconi must use to cover its pensions liabilities.
The remaining 25% of Marconi will be spun off into a separate entity known as Telent. Telent will effectively be a pure-play services business, and will offer a range of services to telecom operators, enterprises, and legacy support services. Marconi expects Telent will have FY2005 revenues of GBP336 million ($600 million).
Telent will become Ericsson’s preferred services provider in the UK, and will also retain Marconi’s existing services customers including BT Group and Energis.
Ericsson said the deal would help it to meet the growing global demand for mobile and fixed broadband Internet access.
Ericsson has undergone a successful turnaround under the leadership of chief executive Carl-Henric Svanberg. The Swedish company is perhaps best known as the one of the largest makers of equipment for mobile phone networks. Marconi, on the other hand, is a British institution that can trace its roots back to the company founded in 1897 by Guglielmo Marconi, the Italian inventor of the radio.
Marconi’s future has been in the balance ever since it was left out of the list of preferred suppliers for the 21st Century Network (21CN) project at BT, Marconi’s traditional home patch and source of around 40% of its revenue. After failing to secure the BT contract, Marconi carried out a strategic review of its options.
There was speculation that China’s Huawei Technologies would be the natural destination for Marconi, before stories emerged that Ericsson was leading the charge.
While Ericsson’s CEO has been expressing his enthusiasm for the acquisition, the news is not so good for Marconi’s 9,000-strong workforce. Some 6,670 Marconi staff will move to Ericsson, but the Swedish firm warned job cuts are unavoidable and it is thought that approximately 1,000 jobs are at risk.
Marconi had its roots in the industry conglomerate GEC. However, in the 1990s the firm sold off its defense assets and changed its name to Marconi in an attempt to become a major player in the telecoms market. Unfortunately, the company was brought to its knees by an over-ambitious acquisition spree, and the dramatic downturn in carrier spending from 2000 to 2003.
Faced with debts of GBP4 billion ($7.14 billion), it was forced into a debt-for-equity swap, asking its banks to accept shares because it could not repay its bills.
Over the past couple of years however, the restructured company had been showing signs of recovery. Yet, in the end, it seems that missing the BT contract has proved to be to big a blow, and the company hopes its prospects will be improved by the scale offered by a company the size of Ericsson.