Ericsson: Not Likely to Buy Juniper or Ciena, Says Citi

Shares of Juniper Networks (JNPR) and Ciena (CIEN) appear to have both gotten a bit of a lift today from a report this morning by Bloomberg’s Adam Ewing that said Ericsson (ERIC) is open to doing large M&A following the €15.6 billion proposed acquisition of Alcatel-Lucent (ALU) by Nokia (NOK), announced back in mid-April.

But some folks threw cold water on the matter, including Citigroup’s Ehud Gelblum, who rates Ericsson shares Neutral.

Bloomberg’s Ewing, having interviewed top Ericsson brass, including chairman Leif Johansson, writes that the company “is open to a transaction to counter a move by rivals Nokia Oyj and Alcatel-Lucent SA” according to multiple unnamed sources, and that there is a “shift in thinking at Ericsson, which has so far relied on smaller purchases.” He writes CEO Hans Vestberg will meet with his staff next month to discuss.

Gelblum is skeptical: “We disagree with the premise of the article and after speaking with the company and doing some thinking of our own, we do not believe there has been any change to ERIC’s thinking or approach to M&A.”

For one thing, there’s no special meeting next month, he contends:

• Far from “gathering” Ericsson’s top managers for an impromptu all- hands-on-deck strategy meeting next month, Ericsson holds an annual global strategy meeting in June every year as a prelude to the beginning of its budgeting process that begins in the August/September timeframe, and we do not believe there is any undue read-through from this one.

For another thing, the company’s got to first back its brand-new products before it signals defeat:

• In addition, with the launch of the new IP router 6000 series and HDS8000 rack scale servers, we believe ERIC would be signaling defeat of these products before they even launched were it to acquire Juniper as why would a carrier purchase the new Ericsson products knowing they may no longer be supported in a few years once a potential Juniper acquisition closes. We therefore see an acquisition of Juniper as Ericsson shooting itself in the foot for a solid year or longer in one of its key growth areas. It just feels way too early to pass the smell test.

Somewhat less definitively, Raymond James’s Simon Leopold , who rates Ericsson stock Market Perform, has doubts, but wouldn’t rule it out:

Although we are not convinced Ericsson will change its views on acquisitions, a Bloomberg story today may fuel speculation regarding such a change. Ericsson management has previously indicated that Nokia’s announced intent to acquire Alcatel-Lucent has not affected its strategic thinking. It would not be in Ericsson’s best interest to fuel such speculation [...] We think if Ericsson makes acquisitions, it is likely to look at smaller transactions with a bias toward software and video, consistent with the pattern over the last five years.

Nine of Ericsson’s ten deals were software-oriented. We believe Ericsson’s R&D efforts are focused on evolving toward a more software-centric business, as well as higher-value services and routing. We also think it strives to evolve its vertical mix away from wireless telcos. Juniper and Ciena are mentioned most often as targets; we doubt either happens, but would consider Juniper more likely and logical.

Juniper shares rose 83 cents, or 3%, to close at $27.81, while Ciena stock was up 60 cents, or 2.6%, at $23.76.