By J. Sturgeon | Financial Post | Aug. 01, 2009The sun had set on the Statue of Liberty hours before on Friday, July 24, harkening the arrival of another summer weekend in New York City. Far above the din of the streets, executives from Telefon AB LM Ericsson and Nokia Siemens Networks BV, two of the world's biggest telecommunications firms, remained hard at work.
"We had Nokia Siemens sitting on one side of the table and Ericsson on the other," James Bromley, Nortel Network Corp.'s lead U.S. attorney, told a Delaware court this week. Representatives of the two international tech giants had been huddled since the morning around the U-shaped boardroom table on the 39th-floor offices of Cleary Gottlieb Steen & Hamilton LLP, in the heart of Manhattan's financial district. They were bidding at a live auction for the most coveted assets bankrupt Nortel Networks had up for sale.
Shortly before midnight, Ericsson emerged the victor with a bid of US$1.13-billion. Mr. Bromley called the court-supervised sale a "milestone transaction." And for Ericsson it was. The Swedish teleco's prize was Nortel's vaunted wireless assets - the very technology powering the tens of thousands cellphone calls, text messages and mobile tweets being made by New Yorkers on the streets below.
The sale, which will close on Sept. 30 barring any regulatory hurdles, will help transform Ericsson into a mobile network behemoth in North America, giving it the technology it needs to sign lucrative contracts with Canadian and U.S. carriers for years to come.
It caps a remarkable string of deals by Ericsson since February that has made North America the company's most important.
"Being able to acquire this part of Nortel gives a very well-rounded base to tackle the business that we already have, plus a lot of the new business that we're going to have," Angel Ruiz, head of Ericsson North America, said in an interview. "It positions us very well."
North American operations will represent upward of 20% of the company's business worldwide after the deal closes, making it far and away its most valuable region. "With the added market share this brings to the table with customers like Verizon and Bell and Telus and US Cellular and a number of Tier-2 carriers, it's going to go from a US$2-billion business to perhaps over a US$5-billion business [annually]," the executive said.
The completion of the Nortel sale will finish off a troika of deals that have catapulted the company to a market-leading position in a North American market readying itself for a massive upgrade cycle.
In February, Ericsson won the contract to become the principal supplier of U.S. giant Verizon Wireless's build-out of its next-generation network. That was followed by a seven-year, US$5-billion deal to manage the networks of Sprint Nextel Corp., another major U.S. operator.
The transactions will leave Ericsson with more than 14,000 employees in North America, including 2,700 in Canada spread between offices in Vancouver and Toronto, where its Canadian operations are headquartered, as well as a sizeable research facility in Montreal. The acquisition will also hand to Ericsson Nortel's highly regarded research labs in Ottawa.
It's no surprise the sudden and formidable rise has left many wondering where Ericsson has come from.
The history of the company in many respects mirrors Nortel's, once a chief rival. Founded in 1876 in Stockholm, Ericsson spent much of the past century developing and selling phone equipment and systems, fuelled in part by the same nationalistic patronage from the Swedish government that Nortel enjoyed from Ottawa through contracts and generous tax incentives.
"They've been around for a very long time," says Douglas Reid, professor of international corporate strategy at Queen's University's School of Business and an expert on the telecommunications industry.
The company has held a presence in Canada for decades, as well, opening its first offices here in 1953. Ericsson is also a considerable investor in Canadian R&D, spending more than $2-billion over the past 10 years - more than $126-million in 2008 alone - primarily through its labs in Montreal, which represent the company's second-biggest facilities in the world.
Mr. Ruiz said the political furor that has erupted in recent weeks over the Nortel sale has come as a bit of shock to the company. "Considering our history," he says," I'm a bit surprised at some of the comments and perception."
Dwight Duncan, the Minister of Finance for Ontario, for example, has called for the sale to be stopped on grounds that it constitutes a national security concern and could spell the end of some high-tech jobs. The federal Liberals have also implored Industry Minister Tony Clement to conduct an in-depth review of the transaction to see if it violates foreign-ownership provisions in the Investment Canada Act.
Echoing what Ericsson's incoming CEO Hans Vestberg said this week, Mr. Ruiz said the company has no plans to scale back Nortel's Ottawa operations for the time being. "We have always touted our R&D presence in Canada, and that will continue to be very, very strong," he said.
The two product lines that comprise Nortel's wireless unit are CDMA networks, a technology still widely deployed by North American carriers, but which is undergoing a gradual decline here and around the world, and so-called long-term evolution or LTE systems, the ultra-fast technology now gaining ascendance with carriers and the gear that will most likely power the next generation of wireless networks.
In LTE, the 500 or so researchers that work at Nortel's Ottawa labs are resources that Ericsson will want to retain, and indeed grow, as the race toward the commercial deployment of the new technology gathers pace through 2010 and beyond, Prof. Reid said.
"The people will likely remain," he said, adding that "meaningful and important telecom work here will still be done."
The only difference? "They'll be doing it under the Ericsson flag not the Nortel."
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