HomeDAS & In Building WirelessEricsson to buy Vonage in $6.2 billion cash deal

Ericsson to buy Vonage in $6.2 billion cash deal

Does a move into the Enterprise make sense?

Ericsson recently announced it entered into an agreement to acquire Vonage Holdings Corp. for $6.2 billion. The transaction expands Ericsson’s plans to grow globally in wireless enterprise and will offer current customers an increased share of market valued at $700 billion by 2030.

“The core of our strategy is to build leading mobile networks through technology leadership,” Börje Ekholm, President and CEO of Ericsson, said in a statement. “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 eight billion connected devices. Today we are making that possible.”

Ekholm also noted that the acquisition would allow Vonage’s developer ecosystem to gain 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,” he said. “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.”

Meanwhile, Vonage CEO Rory Read said that the companies have a “shared ambition” to accelerate their 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,” Read said. “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.”

Additionally, the acquisition builds on Ericsson’s successful integration of Cradlepoint in September 2020. The wireless edge solutions provider has seen continued strong development under Ericsson’s ownership.

Vonage and the Vonage Communications Platform (VCP)

Vonage, a global cloud-based communications provider, has a strong track record of growth and margin evolution. Sales were $1.4 billion in the 12-month period to through September 2021. During the same period, Vonage delivered an adjusted EBITDA margin of 14% and free cash flow of $109 million.

The cloud-based Vonage Communications Platform (VCP) serves more than 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 makes up 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 September 2021. Vonage’s management team projects annual growth of more than 20% for VCP in the coming years.

Ericsson and Vonage – creating a winning combination

Vonage’s presence in the Communication Platform as a Service (CPaaS) segment will provide Ericsson with an opportunity to access a complementary, substantial and high growth segment. With increasing investments in 4G and 5G – and a flourishing ecosystem of new applications and use cases leveraging the power of modern networks – demand from enterprises for programmable networks has been accelerating.

CPaaS technologies democratize network access by offering API enabled communications services. The CPaaS market is expected to reach $22 billion by 2025, growing at 30% annually. Additionally, Ericsson’s global leadership in 5G technology is expected to provide access to the developing space for open network APIs, which is expected to reach at least $8 billion by the end of the decade with a strong growth profile. CSP customers will also benefit from monetizing their network investments, optimizing the user experience and stimulating additional growth opportunities with new and advanced global network APIs and access to Vonage’s unified communications and contact center solutions.

The combination of Vonage’s customer base and developer community and Ericsson’s deep network expertise, 26,000 research and development specialists and global reach create opportunities to accelerate standalone strategies and innovation in the market. This includes accelerating enterprise digitalization and developing advanced APIs that 5G made possible, putting the power of the wireless network and communications at the fingertips of the developer. These types of APIs can be applied to help ensure the quality of critical services like telemedicine, immersive virtual education and autonomous vehicles as well as experiential performance benefits in gaming, augmented and extended reality, over wireless.

In the longer term, Ericsson intends to offer value benefits to the full ecosystem – telecom operators, developers, and businesses – by creating a global platform for open network innovation, built on Ericsson and Vonage’s complementary solutions.

Ericsson, Vonage transaction overview

Once the deal is completed, Vonage will become a wholly owned subsidiary of Ericsson and will continue to operate under its existing name. It will be reported as a separate segment in Ericsson accounts. Vonage is headquartered in Holmdel, New Jersey in the United States with 2,200 employees throughout the United States, EMEA and APAC.

Vonage’s employees will remain with the company and the Vonage CEO Rory Read will join the Executive Team of Ericsson, reporting to CEO, Börje Ekholm. Read joined Vonage as CEO in July 2020. With more than three decades’ global technology industry experience, Read was previously Chief Operating Executive for Dell Technologies and before that, CEO of Advanced Micro Devices (AMD).
Ericsson remains fully committed to previously communicated financial targets, including long-term EBITA margins of 15 to 18%; long term FCF before M&A of 9 to 12% of sales; and a 2022 target EBIT margin of 12 to 14% for Ericsson Group excluding Vonage.

Completion of the transaction is subject to Vonage shareholder approval, regulatory approvals and other customary conditions and is expected within the first half of 2022.

Ericsson’s push to acquire Vonage

Ericsson was eager to purchase a communications cloud-based service company like Vonage stems from slow earnings due to lost business in China and component shortages from the global supply chain slowdown, Bloomberg reports.

“We might see more acquisitions and our job is to create value,” Ericsson Chief Financial Officer Carl Mellander said in an interview.

Vonage’s cloud-based communications platform comprises approximately 80% of its $1.4 billion annual revenues, as it allows developers to embed services like messaging or video into their products. Vonage’s customer base and developer community made it enticing to Ericsson, despite credit analysts at Danske Bank stating the company paid a “quite steep” price for Vonage.
“I think we’re paying the right price,” Mellander said. “It’s a value that we justify, otherwise we wouldn’t do it.”

Ericsson’s owner Cevian Capital AB supported the acquisition and said it welcomed the company’s push to expand within the enterprise segment to enable a “meaningful re-rating opportunity.”
Meanwhile, Vonage had also been under pressure from its investor Jana Partners to explore sale options, according to Bloomberg. Prior to the Ericsson deal, Vonage was working with advisers to perform a full review of the business. The review included a potential full sale of the company.

Cloud communications software—the latest hot tech commodity

The Ericsson-Vonage deal is the latest in a string of acquisitions in the cloud-communications software market, The Wall Street Journal reports. Vonage is one of just a few formidable communications platforms as a service companies in the space that offer tools that businesses use to interact with customers and employees via text, video and chat services.

The industry saw a spike during the COVID-19 pandemic because companies wanted the ability to connect with their customers virtually. Industry leaders Twilio and Sinch both recently entered the cloud communications arena. Sinch acquired privately held Pathwire for $1.9 billion in order to boost its cloud-based email services that businesses use to promote their products.

“Every form of digital communications has its unique benefits and delivering high quality at scale requires both extensive technical capabilities and deep subject matter expertise,” Oscar Werner, Sinch CEO said at the time of the Pathwire acquisition. “Together with Pathwire, we will be able to offer a best-of-breed product set, across messaging, voice and email, that empowers businesses and developers to craft an unmatched, digital, customer experience.”

The company also acquitted Inteliquent and Message Media for $1.1 billion and $1.3 billion, respectively.

Meanwhile, Twilio has completed at least nine deals in the cloud communication software space since 2016, according to investment analytics firm Dealogic. The company’s largest transaction was a $3.2 billion acquisition of Segment last year. The software provider helps companies track and manage customer data.

“Nearly every company is focused on acquiring, retaining and growing their customer relationships through digital engagement,” Twilio co-founder and CEO Jeff Lawson said after his company acquired Segment. “However, the biggest impediment to great digital engagement are the data silos that prevent companies from truly understanding their customers. With the addition of Segment, Twilio’s Customer Engagement Platform now enables companies to both understand their customer and engage with them digitally—the combination is key to building great digital experiences.”

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