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The telecom infrastructure market has been consolidating all around LM Ericsson (Nasdaq: ERIC ) for years. It's time for the Swedish phone hardware giant to do some consolidation of its own.
Some two years after Nokia (NYSE: NOK ) and Siemens (NYSE: SI ) decided to lump their network units together in a joint venture, and one year into the wholesale Alcatel-Lucent (NYSE: ALU ) combination, Ericsson is spinning out its mobile platforms segment into a joint venture with STMicroelectronics (NYSE: STM ) .
The Swiss semiconductor company contributes hardware expertise. Existing customers like Nokia and Samsung should follow along. A few watches and some cheese might help, too. The Swedes bring systems architecture and integration knowledge, and throw in about $1.1 billion up front. Being one-half of the Sony (NYSE: SNE ) Ericsson handset business helps a bit, as do customer relationships with LG and Sharp. In the spirit of a true 50/50 venture, each company will provide four directors to the board; Ericsson supplies the chairman while ST gets to pick the CEO. (No, Viking helmets are not considered business casual in Ericsson's culture, but ABBA ringtones are mandatory. Or at least they should be.)
All kidding aside, the new venture will present a tasty end-to-end mobile platform to handset makers. The premerger operations combined for about $3 billion in 2007 sales, expect to pump that up to $3.6 billion next year, and employ some 8,000 people across the globe. STMicro CEO Carlo Bozotti sees "strong organic and external growth and substantial expansion of financial returns" in the mobile platform market, and hopes that teaming up with Ericsson will turn those dreams into reality a bit faster. Combined, the two divisions touch about 80% of the world's handset shipments today.
Analysts in Stockholm generally like to see Ericsson cleaning up its act in the troubled multimedia sector, much as it did when the handset segment hit a wall back in 2001. On the other hand, they don't like the local hero effectively paying ST $700 million to take the troubled segment off its hands. But it's a small enough deal that the Stockholm bourse shrugged and hardly moved Ericsson's stock on this news.
Handset makers no longer have to wade through a sea of competing platforms when designing their next world-beating models, as the choices whittle themselves down to a handful of very solid options. In the long run, the industry should gain some efficiencies from this trend, returning more cash to investors both here and in Europe.