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Will Ericsson's $6.2 Billion Buyout Start a Consolidation Chain Reaction?

Swedish telecom equipment giant LM Ericsson (NASDAQ: ERIC) is buying cloud-based communications veteran Vonage (NASDAQ: VG) in a blockbuster $6.2 billion deal. This is a landmark event in many ways, stretching beyond its impact on Vonage and Ericsson.

The buyout, by the numbers

Ericsson's offer amounts to an enterprise value of $6.2 billion. The all-cash payment of $21 per Vonage share will come from Ericsson's $7.22 billion in cash reserves. Vonage shareholders are going out on top as the final price tag represents a 28% premium to Friday's closing price.

Vonage's board of directors has given unanimous approval to Ericsson's offer. The deal is expected to close in the first half of 2022, subject to the usual array of shareholder approvals and regulatory reviews.

Closing costs and integration expenses will weigh on Vonage's financial contribution at first. Ericsson projects a positive bottom-line impact by 2024.

Image source: Getty Images.

What Ericsson hopes to gain from a Vonage merger

The market for cloud-based unified communications should add up to $167 billion in global sales by 2025, according to market research firm Million Insights. That works out to a compound annual growth rate (CAGR) of 16.8% over a six-year period. Grabbing a serious slice of this exciting market should be high on the wish list of any company in the general vicinity of the networking and communications industries.

"We will marry the best of the cloud with telecommunications," CEO Börje Ekholm said in an interview with Swedish newspaper Dagens Nyheter. "Expansion into new technology is expensive because growth rates are high, but the margins are also very good if you manage to scale it up."

Furthermore, Ericsson has plenty of incentive to find new business ideas. The company lost many contracts in the Chinese market over the last year, caught in the crossfire as the Swedish government blacklisted Chinese telecom equipment rival Huawei from future network installations.

Will this buyout trigger lots of copycat deals?

I would not be surprised to see Vonage's profitable exit serving as the starting shot for consolidation in the cloud-based communications space.

In particular, I see a big target painted on the backs of head-to-head rivals RingCentral (NYSE: RNG) and 8x8 (NYSE: EGHT). RingCentral is the fastest-growing business in the cloud communications space, and 8x8 is accelerating its growth projections quarter by quarter. Both are firmly established leaders in this fast-growing market, comparable to Vonage's sector stature.

Ericsson wants to braid Vonage's unified communications services with the broadband-everywhere vision of 5G wireless networking. The same idea could bring other telecom giants to the negotiating table, but that's far from the only valid entry point. I'm also keeping a close eye on cash-rich companies on the fringes of the networking sector, as well as growth-hungry tech giants of every stripe.

8X8 or RingCentral could be the missing piece to the remote-work puzzle for any of these potential bidders, now that Ericsson's deal has added some urgency to the process.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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