Ericsson/Vonage: Uncovering the Consequences of a Low-Quality Phone Call

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Clearly, Ericsson made a regrettable decision with Vonage. The Swedish telecommunications equipment manufacturer has taken a $2.9 billion hit to the value of the US cloud-based telecom group it acquired at the end of 2021. Writing off nearly half the value of a deal less than two years after its announcement is a source of embarrassment for CEO Börje Ekholm.

Considering the performance of Vonage’s competitors, investors had long anticipated that Ericsson would write down its goodwill. This explains the modest increase in its shares on Thursday. Sinch, a listed competitor, has lost roughly 80% of its value since November 2021, when Ericsson announced the acquisition.

Investors were skeptical about Ekholm’s rationale for the acquisition from the beginning. Vonage is a mediocre player in the industry, lacking leadership in both technology and market share. Strategic synergies were always difficult to comprehend.

In fact, analysts suspected that Ekholm paid a premium to buy some growth, reflecting Ericsson’s own muted prospects. Its recent performance confirms this.

Alongside the write-off, the company pre-released its third-quarter results, which revealed a 10% drop in group organic sales. Sales of network infrastructure in North America plummeted by 60% as local operators dealt with inventories accumulated during the post-Covid supply chain disruptions.

Battered investors, who have witnessed a more than 20% decline in the share price over the past year, may find some positive news. Specifically, gross margins exceeded expectations. Sales in new markets such as India were more profitable than anticipated. At least the transition to 5G will provide Ericsson with capital-intensive projects for a while longer.

However, Ericsson faces a longer-term issue that the Vonage acquisition attempted to conceal. Its clients, including Vodafone and Verizon, operate in a world of fierce competition and value erosion. This places the burden on Ekholm to take risks with other sources of growth. The write-down suggests that investors should remain cautious.