STOCKHOLM – Ericsson is partnering with Cisco Systems to develop telecommunications networks, the latest combination in the industry as equipment makers seek to expand their offerings to handle soaring Internet traffic.
Stockholm-based Ericsson, the biggest maker of wireless networks, and San Jose, California-based Cisco, the largest maker of Internet-network gear such as routers and switches, said Monday they will cooperate in development and delivery of systems to telecommunications carriers and other customers. The companies predict added revenue of $1 billion or more each by the end of 2018 from the partnership.
The pact allows the two companies to sell more complete network systems to carriers seeking to cope with the flood of data resulting from the increasing popularity of smartphones, tablets, video streaming and cloud services. The partnership also helps Ericsson respond to Nokia’s expansion in that field. Nokia is close to completing its $17.6 billion purchase of Alcatel-Lucent to gain scale in research and development and fixed-lined Internet networks.
“There is a trend towards convergence of wireless and wireline networks, which is likely to increase,” said Janardan Menon, an analyst at Liberum Capital in London. “Companies on both sides need to either acquire or partner to be well positioned for the future. It makes sense from a strategy side, but making the partnership work properly could be challenging.”
Shares of Ericsson gained 2.5 percent to 87.40 kronor at 2:37 p.m. in Stockholm, giving the company a market value of 287 billion kronor ($33 billion). Cisco rose less than 0.1 percent in New York on Friday, for a market value of $145 billion. Ericsson has about 4,500 employees at its North American headquarters in Plano and Cisco has about 1,500 at a Richardson location.
Ericsson and Cisco will work together to develop future technologies for markets such as cloud computing and the Internet of Things — the concept of everything from traffic lights to refrigerators being connected through networks. Ericsson will receive patent license fees from Cisco, and also expects savings of 1 billion kronor in 2018 from the pact.
The network-equipment industry has consolidated as phone carriers have curbed spending amid saturating markets. Nokia agreed to take over Alcatel-Lucent in April, after years of deal-making in the industry that included Nokia combining its networks business with that of Siemens and France’s Alcatel acquiring Lucent Technologies Inc.
Cisco and Ericsson, meanwhile, have shied away from major mergers in favor of smaller purchases to add specific technologies and products.
“I don’t believe in big mergers — this is by far the best solution you can get,” Ericsson Chief Executive Officer Hans Vestberg said in a phone interview. “This is much faster and more efficient.”
Ericsson will benefit as it can reduce spending on developing its own Internet-routing products, said Sebastien Sztabowicz, an analyst at Kepler Cheuvreux with a hold rating on Ericsson shares. Still, partnerships in the network industry have rarely been successful and Ericsson could have generated more value by acquiring Juniper Networks Inc. instead, he said in a note to clients.
Cisco Chief Technology Officer Hilton Romanski said a partnership is preferable to a large merger, which results in a lot of work to combine operations.
“We can move much faster than some of our peers in the market where, instead of us having to explain structures and drive integration, we’ll really be focused on the customer right away,” Romanski said in a phone interview. “A partnership is the best way for us to deliver immediate value to customers.”
Ericsson said Centerview Partners provided advice on the partnership.