Ericsson/Vonage: counting the cost of a poor call

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Clearly, Ericsson made a bad call on Vonage. The Swedish telecoms-equipment maker has written $2.9bn off the value of the US cloud based telecom group it bought at the end of 2021. Writing off almost half the value of a deal less than two years after its announcement is an embarrassment for chief executive Börje Ekholm.  

Given the performance of Vonage’s peers, investors had long expected Ericsson to impair its goodwill. That explains a modest bounce in its shares on Thursday. Listed competitor Sinch has lost around 80 per cent of its value since November 2021, when Ericsson announced the deal.

Investors questioned Ekholm’s logic for the acquisition from the start. Vonage is a middling player in its industry, a leader in neither technology nor market share. Strategic synergies were always hard to fathom. 

Indeed, analysts suspected that Ekholm paid top dollar to buy some growth — a reflection of Ericsson’s own, muted, prospects. Its recent performance supports this.

Alongside the writedown, the group pre-released its third-quarter results, which showed group organic sales down 10 per cent. Sales of network infrastructure in North America, were down by 60 per cent as local operators worked their way through inventories built up during the post-Covid supply chain snafus.

Battered investors, who have seen the share price decline by more than 20 per cent over the past year, could find some good news however. In particular, gross margins came in above consensus. Sales in new markets such as India were more profitable than expected. At least the transition to 5G offers Ericsson capex-intensive projects for a while longer yet.

Yet Ericsson faces a longer term issue, which the Vonage purchase attempted to disguise. Its clients — including Vodafone and Verizon — live in a world of cut-throat competition and value destruction. That puts the onus on Ekholm to gamble on other lines of growth. The impairment suggests investors should remain wary.