Ericsson's Planned $6.2B Vonage Buy Sparks Moody's Downgrade

Pointing to enterprise traffic increasingly being wireless, Ericsson plans to boost its presence in related cloud-based offerings with buying Vonage for $6.2 billion, announced Monday. Analysts evinced some skepticism about the deal, which Ericsson said should conclude in the first half of 2022.

Moody's downgraded its outlook on Ericsson's ratings to stable from positive, "given that following the cash-funded acquisition of Vonage, it will take the company longer than previously expected to reach a net cash positive position." The transaction is "fully priced," said Moody's Tuesday, "and there is execution risk associated with Ericsson's ability to scale up the acquired business and the ability to generate revenue synergies."

Ericsson said network application programming interfaces are well established, but 4G and 5G networks can unlock additional capabilities. It said one of the biggest assets in the deal would be the cloud-based Vonage Communications Platform (VCP), with more than 120,000 customers and more than a million developers globally, and the API in VCP lets developers embed communications such as instant message and video into applications and products. Ericsson said the deal opens the door to communications service providers being better able to monetize their 4G and 5G networks through API-based revenue. The deal ties Vonage's customer base and developers with Ericsson's R&D and global reach, it said.

In a call with analysts, Ericsson CEO Borje Ekholm said that while Ericsson has expanded its presence in the enterprise segment, the Vonage deal represents a second leg of its growth strategy through creation of a global open network platform that would be "a one-stop shop" for developers. He said Ericsson plans additional acquisitions to add communications capabilities. "This is a long-term journey" by Ericsson into the 5G API market, he said. He said Ericsson's core 5G business is seeing "a bit of a tapering off" and the company sees a way of establishing a new market targeting enterprise service providers, with the 5G APIs then driving more traffic on 5G networks.

"It's very 'brave' to imagine that a developer who uses a [communications as a platform service] for doing dentist-appointment reminders ... is going to switch to consuming network APIs for 5G slices," tweeted wireless analyst Dean Bubley. He said the deal "looks like a bit of a kneejerk response" to Mavenir/Telestax or the growth of Twilio. "Or it could be Ericsson really wants to be a midsize ... player" in unified communications as a service/contact center as a service, he said.

"This looks like a probably good acquisition being made for a bad reason," and instead of focusing on bringing 5G APIs to developers, the deal should be about the 5G ecosystem learning from communications as a platform service, Bubley said.

Ericsson had been open about its plans to use transactions to expand its footprint in enterprise, but Vonage wasn't seen as a likely target, Raymond James' Simon Leopold wrote investors. "We like the idea of diversification but envision execution risk" as the deal is expensive and Vonage "does not strike us as a logical adjacency," Leopold said. Ericsson "has a poor long-term acquisition track record," though recent deals with Cradlepoint and Kathrein worked out well, he said. "We have the ability to integrate and run acquisitions in a good way," Chief Financial Officer Carl Mellander insisted on the analyst call.