UPDATE: Ericsson to seek government support for Nortel buy

LM Ericsson of Sweden, which is working on Long Term Evolution (LTE) products in Montreal, plans to approach Export Development Canada asking for help in buying the carrier wireless assets of Nortel Networks Corp. Ericsson was the highest bidder, offering US$1.13 billion, in an auction that wrapped up early Saturday.

Toronto-based Nortel, which has been operating under bankruptcy protection since Jan. 14, has been trying to sell most of its assets for months.

The assets Ericsson will gain are the code division multiple access (CDMA) products, plus the contracts to sell those products to North American carriers. It will also inherit Nortel’s LTE technologies.

“Nortel is a great company with great products and skills and people,” said Carl-Henric Svanberg, Ericsson’s president and chief executive officer, adding the Nortel went bankrupt for “reasons other than that.”

Svanberg made his comment during a teleconference Monday with reporters and investment analysts.

Hans Vestberg, Ericsson’s chief financial officer, said the company has “no plans to consolidate” its 18-year-old Montreal facility with Nortel’s Ottawa research centre.

But he could not say how many Nortel employees will get transferred over to Ericsson in Canada. Ericsson is only saying it plans to hire 2,500 Nortel employees, 400 of whom would work on LTE.

“This is an increase in our investment in LTE,” Vestberg said.

Ericsson will not be acquiring all of Nortel’s LTE patents. It will pay licensing fees for some and will become the owners of others.

The same would have been true for Nokia had it won the auction.

Ericsson refused to say which patents it would licence and which intellectual property it would keep.

It was not clear what Nortel will do with the LTE patents it does not transfer to Ericsson.

Asked whether the firm plans to continue as a going concern, after the sale of assets, for the purpose of licensing intellectual property, a Nortel spokesperson stated in an e-mail: “Nortel is advancing in its discussions with external parties to sell its other businesses; this includes our remaining LTE assets. The company will assess other restructuring alternatives for these businesses in the event it is unable to maximize value through sales.”

Research in Motion Inc. of Waterloo, Ont., which did not participate in the auction, revealed last week it had offered to buy Nortel’s carrier wireless unit and “other assets” for US$1.1 billion. It was not allowed to bid, though the two companies are offering different reasons why. Nortel says RIM refused to sign a non-disclosure agreement and RIM says it was shut out because it refused to agree not to try to buy other Nortel businesses within a year.

Although RIM did not say which “other assets” it sought, two Canadian analysts – Mark Tauschek of Info-Tech Research Group and Ronald Gruia of Frost & Sullivan – have speculated it was intellectual property.

Ericsson employs about 1,800 workers in Canada, about 1,500 of whom work in Montreal. Six hundred answer calls from carriers needing tech support.

Nokia Siemens Networks, which last month offered US$650 million for the same assets Ericsson has acquired, had planned to use the Nortel unit to expand in North America. It has 75 employees in Canada and had planned to offer jobs to 2,500 Nortel employees, one-third of whom would have been in Canada.

The fact that Ericsson was willing to pay more took Toronto industry analyst Ronald Gruia by surprise.

“I always thought (Nokia Siemens Networks) could and should have bid a higher premium,” said Gruia, program leader for emerging telecoms at market research firm Frost & Sullivan. “At the stroke of a pen they could have gained a footprint and presence in North America.”

Ericsson outbid MatlinPatterson, a private equity firm holding about 10 per cent of Nortel’s long-term debt, and Nokia Siemens Networks, whose earlier offer was a “stalking horse” bid that culminated in a 24-hour auction Friday.

When it made its initial bid, Nokia Siemens Networks said Export Development Canada had agreed to loan Nokia Siemens Networks $300 million.

Asked Monday if Ericsson would get similar loan from the government, Vestberg said “we will also see if we can get financing from them.”

He added that would be the “next step” in closing the deal, which is subject to approval from bankruptcy courts in Canada and the U.S.

All acquisitions by foreigners of Canadian companies exceeding $319 million require review by Industry Canada under the Investment Canada Act.

“As we can see it right now we are confident this deal will go through,” Vestberg said, adding it should close near the end of the third quarter of this year.

“It’s going to become a mammoth player in North America,” Gruia said. “They’re becoming almost like the IBM of the wireless business. Nobody’s going to get fired for choosing Ericsson as their wireless infrastructure provider.”

Ericsson said with Nortel’s CDMA business, it will inherit contracts with large North American carriers, including Bell Canada and Telus Corp. Carriers are starting to upgrade their networks to third and fourth generation, but Ericsson officials said this technology will still be of benefit to the firm.

“CDMA is the technology that will go on for many more years and will be a stream of business for several years,” Svanberg said.

Gruia agreed, saying carriers will continue to buy CDMA products for another two years and possibly spend money the following four years on maintenance.

“When the first LTE networks go up they will only be data networks,” he said, adding the carriers will still use CDMA for voice calls.


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