How corporate fortunes can change. Five years ago, Ericsson was riding high as the world’s largest seller of telecoms equipment while Nokia was suffering under the weight of its struggling mobile handsets business.
Fast forward to today and the roles seem to have been reversed. The Finnish company has a renewed confidence after a series of deals and restructurings while Sweden’s Ericsson is under pressure.
The contrast between the two arch-rivals manifests itself in different ways. M&A advisers say Nokia is on the prowl for another deal just as Ericsson abandons its efforts to sell some of its more troubled assets.
Both have just acquired new large shareholders, although of different complexions. Nokia has attracted Finland’s state investment fund Solidum while Ericsson has picked up Europe’s largest activist investor, Cevian Capital. The differences were underlined by the two groups’ most recent results: Nokia’s numbers beat expectations and its shares rose 9 per cent, while Ericsson’s loss was bigger than expected and its shares fell 9 per cent on the day of its results.
However, for investors weighing up both companies there might be more hesitation over which to choose despite all the apparent differences. It is true that over the past five years Nokia has far outperformed Ericsson: its shares have almost doubled, while those of the Swedish group have nearly halved. But in the past six months, the picture is reversed. Ericsson’s shares are up by a fifth while Nokia’s are down almost 10 per cent.
What both have in common is that 2018 will be a year of waiting ahead of the much-anticipated rollout of the 5G telecoms networks on which they have pinned so much of their hopes. Both companies are essentially promising better times, just not yet.
They are also seeking to head off any doubts about how big a success the next generation networks will be. Nokia and Ericsson both have 5G deals with T-Mobile in the US, where they dominate the market. Elsewhere, they are likely to feel the competition from China’s Huawei, which can compete not only on cost but also increasingly on technology.
China, South Korea, Japan and the Nordic countries are likely to be the first to follow the US but there is still some scepticism about how quickly telecoms operators need to upgrade their networks from 4G.
“We are ahead of Huawei in technical development. Nokia is the only company with a strong market position in all key markets . . . The fifth-generation mobile technology increases network capacity per cell by nearly twentyfold,” Rajeev Suri, Nokia’s chief executive, told Helsingin Sanomat newspaper this week.
Market chatter over Nokia doing another deal — after digesting its Alcatel-Lucent purchase from 2015 — has increased. M&A advisers have long touted the likes of Juniper Networks of the US, which has a market capitalisation of $8.7bn, as a possible target. Nokia denied in November that it was in negotiations with Juniper, while Mr Suri said this week that he doubted his company would be interested in a “large acquisition of €10bn-€20bn in the coming years”.
One thing Nokia has in common with Ericsson is a struggle to find good businesses beyond its core networks operations. Ericsson bet on media but then tried, only in part successfully, to sell off those assets. Nokia’s experiments with virtual reality cameras (Ozo) and health technology (Withings) have been similarly unsuccessful.
Across the Gulf of Bothnia in Sweden, some investors such as Cevian see Ericsson offering greater potential, in part because of just how far it has fallen. It has suffered five consecutive quarterly losses. Gross profits in the fourth quarter were under half the level they were at five years ago while revenues were only down 15 per cent.
Borje Ekholm, Ericsson’s chief executive for the past year, has reported some progress with his turnround plan but some remain doubtful about the pace of the company’s restructuring. “The tech world is moving so fast and I just don’t know if Ericsson will keep up,” says one Swedish investor.
The US, meanwhile, has clearly signalled its desire to foster 5G-focused companies in its protection of Qualcomm from the hostile bid from rival Broadcom. Europe has long suffered from a lack of great technology companies and it can ill-afford for either Ericsson or Nokia to slip again.