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Ericsson shells out greenbacks for Redback

With $2.1 billion, company beefs up IP-routing expertise as it tries to help phone companies offer services like IPTV.

Swedish telephone equipment maker Ericsson is making a $2.1 billion bet on new markets such as Internet television.

In a deal announced late Tuesday, Ericsson said it plans to pay $25 a share (about $2.1 billion at current trading prices) for Redback Networks, an Internet protocol router company. That's an 18 percent premium over the value of Redback's shares before the acquisition was announced Tuesday.

The deal comes as the lines between traditional telephony companies, mobile operators and TV providers blur. In many parts of the world, people are substituting wireless communications for traditional telephony services. And both types of companies are upgrading their networks to support what is known as a triple play of services that includes telephony, high-speed Internet access, and TV or video services.

Internet Protocol is the foundation for these new services. Ericsson has already made inroads here, especially in developing new products to help phone companies offer TV service over their IP networks. Earlier this year, it unveiled an IPTV product suite. It also announced a partnership with a company called Kasenna to provide the IPTV software and middleware.

While Ericsson is one of the largest suppliers in the world of wireless- and mobile-telecommunications equipment, it lacks products in the IP-networking market. For the past six or seven years, it has tried to bulk up this expertise through partnerships with IP equipment leaders such as Cisco Systems and Juniper Networks.

But now the company has decided to acquire its own IP expertise. Redback, which competes against Cisco and Juniper in the IP router market, is a logical choice. For one, the $2.1 billion price tag for Redback, which emerged from bankruptcy two years ago, is much more affordable than that of either Cisco or Juniper.

But Redback, the No. 3 player in the router market, also has a well-established customer base, including U.S. phone companies such as BellSouth. Analysts from Lehman Brothers also note that the company is making headway, with its newer IP routers designed to help provide IPTV services with carriers such as Verizon Communications, AT&T, Deutsche Telekom, France Telecom and NTT DoCoMo.

"We have been investing in next-generation technology for some time," said Bjorn Olssen, executive vice president and general manager at Ericsson. "The move to IP requires carrier-class and real-time application technology. The IP knowledge that Redback has and the carrier-class technology we have makes the combination of the companies a very good base, going forward."

The deal also comes as Ericsson's traditional equipment rivals have been busy buying each other. French equipment maker Alcatel and United States-based Lucent Technologies closed their deal last month. German telecommunications equipment maker Siemens and Nokia are planning to merge parts of their businesses early next year to compete. Last year, Ericsson also bought Marconi, a maker of IP-networking gear for about $2 billion.

Financial analysts say they see upsides for both companies if the deal is completed.

"We believe the proposed deal represents a strategic positive for Ericsson, as it would fill a hole in the company's portfolio in the routing area and should enable it to build on Redback's recent momentum in the edge router/IPTV market by leveraging Ericsson's global carrier relationships," a Lehman analyst wrote in a research note distributed to investors Wednesday.

Redback, based in San Jose, Calif., plans to retain its management team and operate as a wholly owned subsidiary of Ericsson. The deal is expected to close by early 2007.