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Will Cisco, Ericsson team up soon?

Posted: 11 Nov 2015 ?? ?Print Version ?Bookmark and Share

Keywords:data centre? merger? wireless service providers? cellular networks?

The consolidating tech industry does not sit well with some big players. This seems particularly true for Cisco Systems and Ericsson, the world's biggest makers of infrastructure for wired and cellular networks.

The giants are too large to win approval from regulators to merge into the market behemoth they would most like to create. So they announced today a set of agreements to resell each other's products and services as well as work to forge a tighter patent-licensing agreement.

It's a good move executed under pressure. Rivals Nokia and Alcatel-Lucent announced in April plans for a $16-billion merger that would create the world's second largest provider of telecommunications systems. With about $28 billion in revenues, the combined companies would leapfrog China's Huawei, the current second place vendor, but still fall behind Ericsson.

The customer base for these companies is already blurring. Data centre giants such as Google are dabbling with efforts to become fibre-optic and wireless service providers. Big carriers are creating larger data centres to offer Internet services to combat the Googles and Facebooks of the world that are turning carriers into providers of dumb pipes for their ad-based services.

It makes sense for these companies to look to vendors who can supply all their systems and one neck to choke when they don't work. The Nokia/Alcalu merger is already well on the way to this goal. The path for a Cisco/Ericsson combination is longer and bumpier.

I suspect regulators in China would be most likely to nix a Cisco/Ericsson merger. Huawei and ZTE are China's most successful tech companies and the most at risk of such a combination.

The Cisco/Ericsson partnership will give each company an opportunity to sell a billion dollars of new equipment and services a year by 2018, they claim. Ericsson in particular is hungry growth given sales are down seven per cent so far this year and were roughly flat over the previous three years, according to a Reuters report.

Much of the merger mania sweeping through the high tech world this year has been less about growing sales and more about cutting costs given maturing tech markets. The semiconductor sector alone has seen 18 M&A transactions valued at more than $100 million so far this year. In the data centre sector, Dell bid $67 billion for EMC in October to combine its server and switch business with EMC's storage systems.

Cisco and Ericsson would love the opportunity to slash parallel efforts, but that seems unlikely without a merger. For example, Cisco has already expanded into becoming a significant supplier of data centre servers. Ericsson announced a similar move earlier this year.

So a partnership is the second best deal for Cisco and Ericsson. It puts the companies in a position to merge should the regulatory situation change. It's also a good deal for employees of the two companies who won't face the layoffs a full merger would no doubt bring.

Now the focus turns to China. Will we see a Huawei/ZTE merger?

- Rick Merritt
??EE Times U.S.

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