• Ericsson has agreed to acquire Vonage in a $6.2 billion deal
• It will massively add to its enterprise business opportunities
• It’s already an established brand and business
• It puts the vendor in closer competition with its telco customers
• Not everyone can see the logic in the sizeable deal

In what Ericsson is calling the next big step in its effort to build an “enterprise business” alongside its key focus area of mobile networks, the Swedish vendor has agreed to acquire cloud-based communications platform specialist Vonage in a deal valued at $6.2 billion.

Ericsson had signalled previously that the enterprise market was a strategic growth area where it aimed to grow both organically and via M&A, following on from its previous enterprise-focused acquisition of CradlePoint, but it’s fair to say this is an unexpected move, as it catapults the vendor into the communications platform-as-a-service (CPaaS) sector that ultimately enables enterprises to develop and use the comms services they need in a way that suits them using a cloud platform. While that is something Ericsson could offer to its telco customers to help them with their enterprise ambitions, the Vonage business is one that deals directly with enterprises and helps them with their communications needs: More than ever, the successful acquisition of Vonage would leave Ericsson competing more than ever with its core telco customer base.   

That’s not the only consideration for Ericsson’s board and management team: $6.2 billion is a lot of money. The vendor’s shareholders clearly think so too: Ericsson’s share price has dropped by 5.3% to SEK93.06 on the Stockholm exchange during Monday trading, its lowest price in more than a year.

As you’d expect, Vonage’s share price shot up by 25.4% to $20.53, just shy of the $21.00 per share that Ericsson is offering in the proposed takeover. 

So what is Ericsson buying and why? 

Vonage entered the communications services market in 2001 as a provider of residential VoIP services, and was one of the early disruptors in that market, challenging telcos in what was then their core fixed line voice cash-cow market. Over the years it has evolved to become a communications platform-as-a-service (CPaaS) provider, enabling communications applications to be integrated into business systems via APIs, an increasingly important cloud-enabled services sector where Vonage competes with the likes of Twilio, Sinch, MessageBird, RingCentral, Amazon (Connect), Brightlink and more. The good news for Ericsson is that Vonage is in the leading pack in this growing market, according to Synergy Research.   

It also offers cloud-based voice and unified communications services to enterprises, competing with the likes of 8x8, BlueJeans (now part of Verizon), Cisco, Zoom, Dialpad, Microsoft, RingCentral and many more. 

Its Vonage Communications Platform serves more than 120,000 customers and the company generated revenues of $1.4 billion, with an EBITDA margin of 14%, in the 12 months to the end of September. Its sales are increasing and its margins improving, so Vonage is moving in the right direction.

Importantly for Ericsson, more than 1 million application developers are registered to the Vonage Communications Platform, and this is where it believes there is a major business opportunity. Ericsson expects 5G to be a major driver for the enterprise comms services market, and that the type of open APIs offered by Vonage will spur a dramatic increase in the range of services developed for the communications market that will further fuel growth and traffic volumes. That, in theory, will benefit CSPs and drive demand for networking technology, CPaaS capabilities and more. 

In Ericsson’s words:

"The combination of Vonage’s customer base and developer community and Ericsson’s deep network expertise, 26,000 R&D specialists and global reach create opportunities to accelerate standalone strategies and innovation in the market. This includes accelerating enterprise digitalization and developing advanced APIs made possible by 5G; putting the power of the wireless network and communications at the finger-tips of the developer. Such APIs can be applied to help ensure the quality of critical services like telemedicine, immersive virtual education and autonomous vehicles as well as experiential performance benefits in gaming, augmented and extended reality, over wireless."

You can read the full justification for the deal in this announcement. 

But not everyone is convinced this is a great move. 

The equity research team at Raymond James like the “idea of diversification, but envision execution risk. Vonage does not strike us as a logical adjacency, and the deal consumes much of Ericsson’s cash... we struggle to appreciate the synergies between Ericsson’s evolving portfolio and Vonage’s.” However, the team also notes that while Ericsson doesn’t have a great track record in M&A, its most recent acquisitions – Cradlepoint and Kathrein (antennas) – have worked out well. 

Meanwhile, Omdia analyst James Crawshaw, in a post on LinkedIn, questions whether Ericsson needed to acquire Vonage to help boost the enterprise use of 4G and 5G services, and wonders whether the vendor couldn’t have simply fuelled the market by offering its own APIs and SDKs? “With this transaction Ericsson is entering the very crowded Communication Platform as a Service (CPaaS) market where rivals to Vonage include RingCentral, Nextiva and 8x8 as well as the Unified Communications as a Service (UCaaS) offerings of Microsoft, Cisco and countless telcos. Will Ericsson's backing allow Vonage to outshine its rivals, or should Ericsson be offering its 5G APIs to all these players?” asked Crawshaw.

It’s a ballsy move by Ericsson, no doubt, but the jury currently is out on this one. 

- Ray Le Maistre, Editorial Director, TelecomTV