I'll bet you didn't know that LM Ericsson (NASDAQ:ERICY), the Swedish maker of telephones and accompanying infrastructure, has a defense business, too. And I'm pretty sure you thought Saab made only cars, all under GM's (NYSE:GM) wing these days.
So when I tell you that Swedish defense, aviation, and space contractor Saab has agreed to acquire Ericsson's defense division in a landmark deal worth about $410 million, I may need to explain further. This acquisition is supposedly an early step in Saab's long-term plan to become an international defense powerhouse, and it's actually been a long time coming.
Did you know that Saab began in the 1930s as an aerospace and defense company? Cars and trucks came later. When the company sold its car division to GM in the 1990s, it also spun off the truck division into a separate business and refocused on its original defense and aerospace businesses. Today's deal is the culmination of several years of advances and rebuffs between Saab and Ericsson Microwave, with a recent offer from Italian Saab counterpart Finmeccania possibly providing the final push to make the deal a reality.
Ericsson's Microwave Systems division has a longstanding relationship with Saab, mainly through providing radar and communications components to Saab's fighter jets. The two companies share ownership in the JAS consortium, which regulates further development, marketing, and sales of the JAS 39 Gripen multifunction attack jet, which competes against the likes of Northrop Grumman (NYSE:NOC) and Lockheed Martin (NYSE:LMT) in its quest to supply high-tech fighters to the world.
Keeping Ericsson's military expertise within Swedish borders must be a huge relief to Prime Minister Goran Persson and his cabinet, and Saab management is talking about further expansion through acquisitions outside the country. Danish battlefield command expert Maersk Data Defence was added to the Saab fold last month, for example.
Ericsson made sure that Microwave Systems patents relevant to the mother ship's core operations will stay with Ericsson, and the core business should see very little impact from the deal. The division contributed about 2 billion Swedish kronors in sales last year, which, at roughly $272.4 million in American money, is a drop in the ocean considering the company's $19 billion in total 2005 revenue.
Saab, on the other hand, should be happy for the increased synergies and immediate 10% top-line boost. Raytheon (NYSE:RTN) probably shouldn't be scared quite yet, but Saab is a definite up-and-comer in the military industry today.
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Fool contributor Anders Bylund thinks the Gripen fighter is way cool, but he doesn't own stock in any company mentioned today. Foolish disclosure is stricter than military policy.
