Ericsson to buy Redback for $2.1 billion

Ericsson plans to acquire carrier edge router maker Redback Networks for $2.1 billion, giving the Swedish telecom giant ammunition to battle Cisco, Juniper and its new two-headed foe, Alcatel-Lucent in the edge router market.

See: Q&A:What Redback acquisition means to Ericsson

Redback’s routers are used to carry IP voice, video, data at the edge of carrier networks. The company, which has 800 employees, will become a wholly owned subsidiary of Ericsson, but will retain its management team, the company said.

Kevin DeNuccio, Redback’s president and CEO, will report to a management board led by Ericsson President and CEO Carl-Henric Svanberg. Ericsson will make a tender offer for all outstanding shares of Redback stock at $25 per share. Before the deal was announced Tuesday, Redback shares on the NASDAQ had closed for the day at $21.17.

After the acquisition, which is expected to close in early 2007, the company will accelerate its product development and gain global reach and financial resources, Redback said.

Carriers that once delivered simple Internet access are now delving into VoIP, video and other services. As a greater variety of carrier services are delivered via IP networks, the devices closest to the customers who consume those services have a more complex job to do. To that end, research firm Dell’Oro Group predicts worldwide edge router sales will grow 21% this year to around $3.2 billion.

The Redback acquisition puts Ericsson in direct competition with Cisco in this emerging market. In 2004, Cisco and Ericsson formed a strategic alliance in 2004 to deliver carrier wireless and wireline technology. Ericsson also has a partnership agreement with Juniper to deliver packages of IP mobility gear to service providers.

“Juniper’s reselling relationship with Ericsson is likely at risk,” said Brantley Thompson, an analyst with Goldman Sachs, in a report on the deal. “It will be important to monitor how and when this is impacted.”

Founded in 1996, Redback has beaten some bigger rivals by focusing on multiservice router technology. A strong relationship with AT&T, which plans a broad upgrade over Redback routers in the coming quarters, is helping to fuel Redback’s growth.

Redback’s sales grew strong over the last few years, increasing 42% since 2003. While it has not posted a profit the last three years, the company has cut its losses 83% over that time.

In its most recent quarter, reported Oct. 20, the company’s $70 million in sales nearly doubled its revenue from the third quarter a year ago. It also turned a profit of $9.1 million, compared with a loss of $4.2 million a year ago. Between 2004 and 2005, Redback grew its broadband/DSL aggregation router sales from $44.9 million to $91.9 million, according to the Dell’Oro Group.

Cisco still dominates edge router market, with 55% of worldwide revenue, while Juniper is the in second place, followed by Alcatel-Lucent and Redback. Network World reported that Redback might have been beaten out by Cisco and Juniper in a deal with as much as $125 million for a Verizon network upgrade.

Stephen Lawson is a reporter for IDG News Service