What would the granddaddy of telecommunications equipment (Ericsson) want with one of the established favorites in MPEG 4 High definition encoding (Tandberg), unless it was entering the business of offering IPTV networks.
That’s a fairly inevitable conclusion of Ericsson’s very late bid for Tandberg Television, attempting to hijack the acquisition already agreed between the Tandberg board and US group Arris, specialist in cable voice services.
Tandberg was wanted by Arris to broaden its appeal outside of cable, and Ericsson wants it to broaden its appeal outside of cellular infrastructure. The difference is that for Ericsson, the price is chicken feed and you would expect any determined effort by Ericsson to land the deal. But will it be a determined effort?
Tandberg already explained to shareholders that it went through a long and diligent process to bring it to the point where the Arris bid was accepted, and revealed that there were multiple bidders in negotiations aided by Deutsche Bank. These bids were triggered as soon as Tandberg issued a profits warning last September and we can’t accept that the negotiations didn’t include Ericsson right from the outset, and Tandberg says on its web site that more than one company conducted due diligence.
And if the deal was agreed to, as Tandberg has said, partly because of market consolidation among both customers and competitors, and partly because of the loss of business to larger competitors, then the Ericsson deal would surely be preferable.
The Ericsson offer was all in cash valuing Tandberg at 9.8 billion Swedish Krona around $1.4 billion, more than 10% higher than the Arris original deal, which was around $1.2 billion in a mix of cash and shares.
Arris investors reacted badly to the deal in the first place in January with the market capital of Arris falling $60 million to $1.4 billion, just $200 million more than the bid. The deal represented a 47% premium on Tandberg’s price prior to a deal being announced, so the new deal is way over a 50% premium.
Ericsson’s statement is pretty bullish saying it has bought 11.7% of the outstanding shares and has agreements for a further 13%. That’s enough to block the Arris deal and it is now almost certain to unravel. An increase in the bid from Arris would almost certainly mean that its shareholders would revolt further and drive its share price to a level where the deal was impossible. So Arris is effectively out of it, but that doesn’t mean that everybody else is.
As slowly as Ericsson seems to be bringing together its IPTV strategy, almost after the market has entered Tier 1 build out stage, Cisco is also entering the same market, both with an eye on Alcatel’s IPTV dominance and Motorola’s abilities in the cable market.
Neither Cisco or Motorola on the face of it appears to need an encoder operation. Motorola offers encoder services to the cable community, as does Cisco acquisition Scientific Atlanta, but encoding for IPTV is somewhat more advanced and more tricky than for cable, and behind Motorola’s encoding efforts for AT&T is tiny US company Modulus, and yet it felt the need recently to also acquire Tut Systems another IPTV encoding specialist.
Wherever Tandberg ends up this will leave Harmonic as the senior independent encoder specialist, and if neither Motorola or Cisco move for another shot at Tandberg, then it is likely that they will look at Harmonic, but perhaps only if and when it falters financially in the way that Tandberg did.
Carl-Henric Svanberg, president and CEO, Ericsson, said, “IPTV for cable and telecom operators is the biggest networked multimedia opportunity going forward. Ericsson and Tandberg Television is a strong combination with a unique ability to offer complete IPTV solutions. Tandberg’s leading TV technology and customer base and our global presence and strong position in IP networks and IMS, will create a leading player in networked media solutions for telecom, cable and satellite operators as well as media companies.”
Yes that’s all very well, but a marketing agreement with IPTV middleware firm Kasenna, which has yet to yield a single public deal in IPTV for Ericsson, makes it look like this is so far all hot air and that it is entering the market as an afterthought.
But once Tandberg is on board, suddenly Ericsson will have a toe in the water for IPTV and other video systems and will need to act swiftly to dress it in further substance to make a splash in the wider fixed line video market. Of course Ericsson may be more interested in acquiring the asset to chase the nascent mobile video market including mobile TV, multicasting and unicast TV services, something it is also known to be keen on, although using IMS it might be able to pitch these as one converged market.