Ericsson battens down its hatches

As Europe's mobile phone industry reels from mountainous debt and emptying order books, Ericsson said that it would cut its work force by an additional 20 percent.

3 min read

LONDON--As Europe's mobile phone industry reels from mountainous debt and emptying order books, L. M. Ericsson, the leading maker of wireless network equipment, said today that it would cut its work force by an additional 20 percent, that it would still probably lose money this year and that it would ask its shareholders for almost $3 billion in new investment.

The news sent the company's stock plunging in value by almost one-quarter, closing at 27.3 Swedish kronor ($2.65) a share, their lowest in nearly five years.

Coming a few days after Ericsson's leading rival, Nokia of Finland, released a sharply downbeat sales forecast, Ericsson's announcement spread gloom among investors in a number of European technology stocks, like Alcatel of France and Siemens of Germany.

In that climate, according to Per Lindberg of Dresdner Kleinwort Wasserstein, Ericsson's plans for cost-cutting and a rights issue are "two insurance measures." In Mr. Lindberg's view, Ericsson "is saying, `What if this turns into a worst-case scenario?' "

He said he was somewhat surprised by investors' reaction. Ericsson was sending signals, he said, that "it doesn't want to sell assets in this market it wants to buy assets" with some of the cash it hopes to raise by selling shares.

Still, the news seemed a further confirmation that the wireless business, seen just a year or two ago as the wave of the finger-snapping mobile future, is deep into a serious downturn. Trouble has spread from the network operators, like Vodafone of Britain and Telef?nica of Spain, to the companies that supply the equipment to carry voice traffic, text messages and data transmissions.

Nokia makes most of its money from the parts consumers see, the handsets. But Ericsson gets 90 percent of its revenue from the sales of network equipment. Its customers began canceling or postponing orders in great numbers last year, and Ericsson acknowledged today that the decline seemed to be extending into 2003.

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"We have to change our expectations for this year, and we'll see the upturn move well into next year," said the company's chief executive, Kurt Hellstrom.

For the first quarter of 2002, Ericsson said, it lost 2.97 billion kronor ($289 million), compared with a profit of 424 million kronor ($41.2 million) in the first quarter of 2001.

Ericsson posted the first annual loss in its history, some $2 billion, for all of 2001. It withdrew from the handset market as an independent player, instead setting up a joint venture with the Sony Corporation last October. Ericsson said that new venture broke even in the first quarter of 2002, sooner than expected.

New orders at Ericsson fell by half in the first quarter, to 37.7 billion kronor; sales fell by about one-quarter, worse than analysts had expected.

The layoffs announced today will eliminate 17,000 jobs this year and next, reducing the total work force to 65,000; the company had 107,000 employees at the end of 2000. The restructuring will cost around $1 billion over two years, the company said. Some analysts said they were surprised by the extent of the job reductions.

Ericsson said today that it would offer current shareholders the opportunity to buy new shares worth the equivalent of $2.9 billion and that the proceeds would go to pay debt and make acquisitions. The company is controlled by two major Swedish investors, Industrivarden and the Wallenberg family's Investor, which together have 67 percent of the voting rights in the company though they own only 7 percent of the equity. That means the cost of the rights issue to Ericsson's biggest shareholders will be limited.

"This is discussed in Sweden," Mr. Lindberg said. "On the one hand, we would like to see Ericsson being in the hands of Swedish investors: we feel easier with them than with foreigners. Against that, it's discriminatory against other Swedish investors, too. It's a double-edged sword."

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