Ericsson to acquire Vonage to create a global VoIP network and communication platform

Ericsson has agreed to buy VoIP network operator Vonage for $21 per share, for a total of $6.2 billion. The board of directors at Vonage approved the deal, which will enable Ericsson to expand its enterprise operations globally and build on its integration of Cradlepoint in September 2020.

Vonage reported revenues for the 12 months to end September of $1.4 billion, with an adjusted EBITDA margin of 14% and free cash flow of $109 million. The merger price represents a premium of 28% to Vonage’s closing share price on 19 November and 34% to the volume-weighted average share price for the three months to 19 November.

Vonage’s presence in the Communication Platform as a Service (CPaaS) segment will provide Ericsson with access to a complementary and high-growth segment, the company said. The combination will also accelerate enterprise digitization and the development of advanced APIs made possible by 5G. Over the longer term, Ericsson intends to deliver services to the full ecosystem, including telecom operators, developers, and businesses, by creating a global platform for open network innovation, built on Ericsson and Vonage’s complementary solutions.

The cloud-based Vonage Communications Platform (VCP) serves over 120,000 customers and more than one million registered developers globally. The API (Application Programming Interface) platform within VCP allows developers to embed high quality communications – including messaging, voice and video – into applications and products, without back-end infrastructure or interfaces. Vonage also provides Unified Communications as a Service (UCaaS) and Contact Center as a Service (CCaaS) solutions as part of the Vonage Communications Platform.

VCP accounts for approximately 80% of Vonage’s current revenues and delivered revenue growth in excess of 20% in the three-year period to 2020, with adjusted EBITDA margins moving from -19% in 2018 to break-even in the 12-month period to 30 September 2021. Vonage’s management team projects annual growth of over 20% for VCP in the coming years.

Börje Ekholm, President and CEO of Ericsson, says: “The core of our strategy is to build leading mobile networks through technology leadership. This provides the foundation to build an enterprise business. The acquisition of Vonage is the next step in delivering on that strategic priority. Vonage gives us a platform to help our customers monetize the investments in the network, benefitting developers and businesses. Imagine putting the power and capabilities of 5G, the biggest global innovation platform, at the fingertips of developers. Then back it with Vonage’s advanced capabilities, in a world of 8 billion connected devices. Today we are making that possible.”

“Today Network APIs are an established market for messaging, voice and video, but with a significant potential to capitalize on new 4G and 5G capabilities. Vonage’s strong developer ecosystem will get access to 4G and 5G network APIs, exposed in a simple and globally unified way. This will allow them to develop new innovative global offerings. Communication Service Providers will be able to better monetize their investments in network infrastructure by creating new API driven revenues. Finally, businesses will benefit from the 5G performance, impacting operational performance, and share in new value coming from applications on top of the network.”

Rory Read, CEO of Vonage, says: “Ericsson and Vonage have a shared ambition to accelerate our long-term growth strategy. The convergence of the internet, mobility, the cloud and powerful 5G networks are forming the digital transformation and intelligent communications wave, which is driving a secular change in the way businesses operate. The combination of our two companies offers exciting opportunities for customers, partners, developers and team members to capture this next wave.”

“We believe joining Ericsson is in the best interests of our shareholders and is a testament to Vonage’s leadership position in business cloud communications, our innovative product portfolio, and outstanding team.”

References:

https://www.ericsson.com/en/press-releases/2021/11/ericsson-to-acquire-vonage-for-usd-6.2-billion-to-spearhead-the-creation-of-a-global-network-and-communication-platform-for-open-innovation

CEO and CFO presentation (pdf)

Two webcasts on November 22, 2021:
9:10 AM CET: Replay 
3:30 PM CET: Replay

2 thoughts on “Ericsson to acquire Vonage to create a global VoIP network and communication platform

  1. Ericsson’s Largest Acquisition Ever
    The deal with Vonage, which represents the largest ever for Ericsson, follows last year’s $1.1 billion acquisition of wireless WAN vendor Cradlepoint.

    “Cradlepoint gave them some of the network APIs, and Vonage will bring them the communications APIs, and I actually think that makes some sense,” said Zeus Kerravala, founder and principal analyst at ZK Research.

    “The important thing to understand about 5G is that it’s cloud native. That creates an excellent opportunity for a developer platform on top, and then roll out a whole bunch of other applications that run on top of that network that are integrated in the network,” he added.

    Despite that potential logic for the deal, Kerravala and other analysts describe Ericsson’s purchase of Vonage as a surprise. “On paper it looks a little bit like square peg, round hole,” Kerravala said.

    Where’s the 5G Connection?
    Dell’Oro Group VP Stefan Pongratz also expressed some slight bewilderment about the deal due to a lack of clear synergies with 5G connectivity. “With carrier revenues now growing at the fastest pace in 10 years, and operators and suppliers slowly coming to terms with the fact that connectivity is a profitable business with upside potential if done right, it is somewhat surprising to see this pivot,” he wrote in response to questions.

    “The enterprise WiFi access point installed base is roughly one-thousand times the size of the private wireless LTE/5G small cell installed base, meaning we have a long way to go when it comes to LTE/5G connectivity in the enterprise,” Pongratz added.

    Ericsson CEO Börje Ekholm said Vonage provides the company with key capabilities that enhance its position in the wireless enterprise market. “Vonage creates impetus for the second leg of our strategy, developing a global open network innovation platform,” he said on a conference call.

    “Our shared intent with Vonage is to develop a platform that allows developers to access network capabilities, which literally puts the power of the wireless networks at their fingertips,” Ekholm added.

    Vonage Bolsters Ericsson’s Enterprise Aspirations
    That strategy paired with the Vonage acquisition provides Ericsson with a “significant arsenal” to further expand into the enterprise segment, according to John Byrne, service director of telecom technology and software at GlobalData. He too pointed to Vonage’s developer community as one the biggest benefits for Ericsson.

    “As 5G continues to evolve, these developers could jumpstart development of more sophisticated network slice use cases,” Byrne wrote.

    “I think the acquisition is likely to have enterprise customers view Ericsson in a different light. To succeed they will need to make sure that the developer community remains educated and provide incentives to encourage Vonage developers to become loyal Ericsson developers,” he added.

    Many analysts expected Vonage to be acquired but few, if any, expected Ericsson to be the acquirer. Count Stéphane Téral, chief analyst at LightCounting, among that group. “It is only a smart move if Ericsson gets serious about CPaaS for enterprises,” he explained.

    “After its voice-over-IP (VoIP) debut at the beginning of this century, Vonage managed to create a niche in the industry, competing only with a few other players. Acquiring it provides Ericsson with a serious CPaaS play that is going to challenge this niche market but also reinforces Ericsson’s position in the enterprise market,” Téral added.

    Téral and Kerravala both pointed to Twilio as one of Vonage’s primary competitors, which places Ericsson in a new competitive landscape as well. Kerravala isn’t convinced Ericsson will become a big player in the UCaaS or CCaaS markets, but he said the company could replicate what Twilio has done by going after enterprise developers with a combination of Cradlepoint and Vonage for telco operators.

    Indeed, according to Kerravala, the impact of this deal will largely ride on Ericsson’s ability to effectively use and expand upon Vonage’s strength with developers focused on enterprise communications.

    “If Ericsson is serious about really wanting to be an enterprise communications player, I’d actually like to see them do a roll up” and acquire more suppliers, he said. “Are they in or are they out in the enterprise? If you’re in, be serious about it. Go buy another one.”

    https://www.sdxcentral.com/articles/news/ericssons-6-2b-vonage-acquisition-mystifies-analysts/2021/11/

  2. Vonage generates most of its sales today from its Vonage Communications Platform (VCP), a medley of unified communications products. It competes here against firms including 8×8, RingCentral and Zoom and hauled in about $915 million in VCP revenues last year, a 14% increase on its 2019 take. The other $333 million Vonage made in sales came from its slowly perishing consumer division.

    Unified communications? Ericsson? VCP does not obviously chime with anything Ericsson CEO Ekholm and his lieutenants have been saying about the strategic priorities for a firm whose focus is 5G. Investor befuddlement is no surprise. Ericsson’s real interest, though, seems to be in a dynamic bit of the VCP business that might just have some 5G value.

    API days

    That bit taps into the growing demand for APIs (application programming interfaces), a market Ekholm has noticed is hot property. These APIs, essentially, are the joiners between technologies and services sold and used by different companies. “The simplest example is the SMS that companies send you for two-factor authentication,” explains James Crawshaw, a principal analyst with Omdia (a Light Reading sister company). “Twilio allows you to connect your application to all the mobile operators in the world so you don’t have to do 1,000 separate integrations.”

    It is big business and set to get even bigger. Ericsson reckons API trading generated about $6 billion in revenues last year. By 2025, that market will be worth $22 billion annually, it estimates. And Vonage is the number-two player in this sector, behind Twilio, says Crawshaw. Its API revenues were up 43% year-on-year for the recent third quarter, to $155 million, as overall Vonage sales grew 13%, to $358 million.

    Ekholm’s belief seems to be that Vonage’s community of about 1.1 million developers can be unleashed on 5G, taking advantage of Ericsson’s own 5G expertise. Instead of providing SMS joiners for telcos, they could pivot to 5G network APIs for connecting factory equipment, for instance.

    But some experts are not convinced Vonage will necessarily prove so versatile. In an insightful blog, Tom Rebbeck, research director at Analysys Mason, points out that Vonage developers “are used to including a few lines of Vonage code to enable an app to use voice services or send an SMS, quite different services to those enabled by 5G.”

    Dean Bubley of Disruptive Wireless is similarly skeptical. “It’s not obvious to me that a developer doing SMS appointment reminders for dentists is going to suddenly pivot to consuming 5G network slice/QoS [quality of service] APIs, or writing rApps for energy optimization of an open RAN radio network,” he wrote in a LinkedIn post shortly after the deal was announced.

    Another issue, as far as Rebbeck is concerned, is the need – acknowledged by Ericsson – to ensure APIs are global, open and multivendor. “Nokia, Huawei and other network vendors may not feel that Ericsson is the ideal partner to generate value from network APIs,” says Rebbeck. “They have little incentive to cooperate in assisting Vonage-Ericsson in its plans.”

    Huge premium

    The deal also lumbers Ericsson with units that are non-strategic and still account for the bulk of Vonage’s revenues. In fact, even the APIs business is not obviously strategic until the Vonage list of APIs includes something about 5G. This all raises questions about the $6.2 billion fee and may have observers asking whether Ericsson could have built a ground-up, 5G-focused APIs business for less.

    It is worth noting, too, that Vonage acquired the entirety of its APIs business through takeovers of Nexmo, in 2016, and TokBox, in 2018. The first acquisition cost it just $230 million and the second as little as $35 million, says Crawshaw. After this week’s multi-billion-dollar activity, those seem like retrospectively canny moves by Vonage.

    Ekholm has proven naysayers wrong before and enjoyed a remarkably successful stint at Ericsson since taking over in early 2017. But shareholders will undoubtedly wonder if the $6.2 billion he paid for Vonage would have been better spent elsewhere. The transaction consumes just about all the net cash Ericsson had on its balance sheet at the end of the recent third quarter. The pressure is on to show that made sense.

    https://www.lightreading.com/5g/ericssons-$62b-vonage-deal-has-befuddled-investors—no-wonder/a/d-id/773739?

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