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Creating Value through Divestiture?

Ericsson pursues a more focused business strategy to revitalize technology and market leadership, improve group profitability, and enable customer success.

With a new CEO at the helm, is Ericsson divesting assets that are not part of its core businesses, and looking to return to sustainable growth? Is that what Börje Ekholm, Ericsson President and CEO, meant on March 31, 2017, when he said, “For some time, Ericsson has been challenged on both technology and market leadership and the group strategy has not yielded expected returns. In our strategy review, we have listened carefully to customers around the world and made an in-depth analysis of our portfolio and performance. To enable us to immediately take action and move with speed in execution, we are today outlining our path to restoring profitability and to lead with innovation and best-in-class solutions in areas we have decided to focus on.” This was when Ericsson presented its focused business strategy.

The vendor recently announced that it had signed an agreement with multinational technology and sketch-to-scale (TM) solutions provider, Flex, to divest Ericsson Power Modules (EPM). The divestment is in line with Ericsson’s focused business strategy, presented on March 28, to strengthen its core business and portfolio areas (networks, digital services, and IoT).

The Ericsson Power Modules business, excluding the brand, will on closing be transferred to Flex as part of the agreement. This includes Shanghai Ericsson Electronics Corporation Ltd., a manufacturing site in China, and business assets in Sweden. More than 300 employees and consultants are expected to transfer from Ericsson to Flex Power. Ericsson Power Modules designs and manufactures power supply products for information and communications equipment, including radio base stations, switches and routers, as well as additional computing and industrial applications.

“Ericsson Power Modules with its skilled people has built a strong position and offering within the power industry. But in line with our strategy, we are focusing our business on fewer core areas.” said Christian Hedelin, Head of Strategy, Business Area Networks, Ericsson.

Earlier this month, Bloomberg reported that Ericsson may also be selling its USD 1 billion media business, and has hired Goldman Sachs to look for a possible buyer. In April 2017, Ericsson reported a USD 300 million first quarter operating loss for its media businesses, and said it was exploring “strategic opportunities.” Ericsson’s new CEO, Börje Ekholm, has said he wants to focus on networks, digital services, and the Internet of Things.

It is not clear whether digital services will include Ericsson’s vast media business, which the company has built up over the years through a series of acquisitions. The unit includes the former Tandberg TV and Microsoft Mediaroom, as well as video processing software and video delivery hardware. Ericsson’s media businesses represent less than 5 percent of overall company revenue.

Ericsson has been near crisis mode for more than a year following a series of earnings disappointments that triggered the departure of former CEO Hans Vestberg last summer. Having taken charge of the company in January, Ekholm is faced with a shrinking addressable market together with unrelenting competition from Huawei Technologies Co. Ltd., which last year overtook Ericsson to become the world’s biggest supplier to communications service providers. Signs of a turnaround at Nokia Corp. have piled further pressure.

Ekholm has said his priority is to restore profitability at the company, which saw its net income tumble to just SEK 1.9 billion (USD 220 million) last year from SEK 13.7 billion (USD 1.56 billion) in 2015. The goal is to boost Ericsson’s operating margin to about 12 percent from its level of 6.2 percent (excluding restructuring charges) in 2016.

Revenues across the entire business fell by nearly a tenth last year, to SEK 222.6 billion (USD 25.4 billion), and by nearly 7 percent at the media business, to about SEK 9.7 billion (USD 1.1 billion).

“With these changes I am confident that we will create the most intelligent and efficient networks, deliver the most competitive solutions and constantly innovate to enable our customers to succeed in a fully connected world.”

Brje Ekholm, 
President and CEO,

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