Ericsson and Redback Networks: A Cinderella Story

European telecommunications equipment vendor Ericsson plunks down $2.1 billion to acquire Redback.

Multiservice edge routing provider Redback Networks on Dec. 19 became the Cinderella of the telecom industry when European telecommunications equipment vendor Ericsson announced its plans to acquire Redback for $2.1 billion.

Ericsson offered Redback shareholders $25 a share for the company, which had filed for bankruptcy in 2003 when the telecommunications equipment market went bust. The $25 share price was an 18 percent premium over the closing price of Redbacks shares yesterday, but a 60 percent premium over the average of the last 90 days, according to Ericsson.

Redback, which cut 1,000 jobs three years ago and set out to pioneer a router with integrated subscriber management built on a modular operating system, now has 15 of the top 20 wire-line carriers as customers using its Smart Edge router. And it tripled its market share over the past year to about 11 or 12 percent, according to Marco Wanders, chief marketing officer for Redback, in San Jose, Calif.

"Redback really has been a Wall Street darling," commented Eve Griliches, program manager at International Data Corp. "Everybodys been pulling for them—coming out of bankruptcy, gaining more and more market share, hitting profitability ahead of their goal."

Griliches pegs the edge router market at $3 billion in 2006, although she said she believes there are more opportunities for Redback in wireless backhaul opportunities and at the edge of the core router market. Yankee Group said it expects that market to swell to over $5 billion by 2009.

The deal, which is expected to close early in 2007, sets up Ericsson to compete directly with broadband edge market leader Alcate-Lucent, along with Cisco Systems and Juniper Networks. Those vendors have edge routers or Layer 3 edge switches that implement MPLS (Multiprotocol Label Switching), which is key for the emerging approach of multiservice edge routing over a single IP infrastructure.

"Ericsson didnt have a product set in IP MPLS. Now they do," said Mark Bieberich, a vice president at Yankee Group Research. "In the past two years theyve seen archrival Alcatel become very strong in that market. Growth is very strong for IP MPLS infrastructure. A top-tier vendor cant afford not to compete," he said.

All of those vendors are chasing new opportunities with services providers looking to deploy IP TV and other video, voice and mobility services over a single IP-based network, using next-generation architectures.

/zimages/1/28571.gifTo read about how Cisco is targeting a new router at IP TV providers, click here.

Redback, which will retain its management team and operate as a wholly owned subsidiary of Ericsson, brings a unique combination of strengths to the edge routing space.

"Redback, while being small, has the next-generation architecture everybody is talking about. They have integrated Ethernet aggregation, subscriber management and full routing on top of a modular operating system," Griliches said. "They came out of the chute designing [the Smart Edge router platform] for integrated routing/subscriber management, which is exactly what carriers are demanding. Others didnt do that. What they havent had is the credibility of delivering features on time and really growing across many, many customer wins. Ericsson will really help them with that," she said.

Redback also gives Ericsson a stronger presence in the United States. "Ericsson bought Redback more for their U.S. presence and having a product of their own, instead of OEMing it from Juniper," said Frank Dzubeck, president of Communications Network Architects.

Ericsson gives Redback deep pockets with which to speed product development. But more importantly, it adds significant systems integration expertise, which is key to expanding Redbacks business, said Redbacks Wanders.

"How you can integrate your products into a service providers network is key. You need the systems integration capabilities that Ericsson brings to the table. Ericsson will have an enormous amount of impact on Redbacks existing networks," Wanders said.

It also brings to Redback greater credibility as part of a much larger and more financially stable entity. Together the two vendors can compete more effectively as wire-line and wireless services converge—a strategy Redback had been pursuing.

"Fixed mobile convergence is part of our strategy. We were on the track to introduce wireless functionality, which will also run on an IP network," Wanders said. The opportunity there with Ericsson will allow the combined entity to pursue 2 billion wireless users, as opposed to 250 million broadband users, he added.

That may be true outside the United States, but carriers in the United States are not anxious to cannibalize their higher margin wire-line subscriber business, Dzubeck pointed out. "Fixed mobile convergence doesnt go over big here. Verizon and AT&T believe theyre the loser in that. Fixed mobile convergence in your own territory means youll lose revenue," he said.

Its unclear how the Redback acquisition will affect Ericssons partnership with Juniper Networks, but the Redback Smart Edge will over time become the preferred product offering, industry observers said.

According to Bieberich, the competitors left out in the cold by this move could be Nortel Networks and Nokia/Siemens.

"Both those companies may have partnerships to address [the IP MPLS edge router] market. I think this deal proves that top-tier vendors have to have more than just partnerships. They have to have a product portfolio they can control and direct over next few years. Nortel and Nokia/Siemens need to make an acquisition over the next 12 to 18 months," Bieberich said.

Once the deal is completed, Redback President and CEO Kevin DeNuccio will report to an Ericsson management board, led by CEO Carl-Henric Svanberg. No layoffs are planned.

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