(Bloomberg) -- Ericsson AB is partnering with Cisco Systems Inc. to develop telecommunications networks, the latest combination in the industry as equipment makers seek to expand their offerings to handle soaring Internet traffic.
Stockholm-based Ericsson, the biggest maker of wireless networks, and San Jose, California-based Cisco, the largest maker of Internet-network gear such as routers and switches, said Monday they will cooperate in development and delivery of systems to telecommunications carriers and other customers. The companies predict added revenue of $1 billion or more each by the end of 2018 from the partnership.
The pact allows the two companies to sell more complete network systems to carriers seeking to cope with the flood of data resulting from the increasing popularity of smartphones, tablets, video streaming and cloud services. The partnership also helps Ericsson respond to Nokia Oyj’s expansion in that field. Nokia is close to completing its $17.6 billion purchase of Alcatel-Lucent SA to gain scale in research and development and fixed-lined Internet networks.
"There is a trend towards convergence of wireless and wireline networks, which is likely to increase," said Janardan Menon, an analyst at Liberum Capital Ltd. in London. "Companies on both sides need to either acquire or partner to be well positioned for the future. It makes sense from a strategy side, but making the partnership work properly could be challenging."
Shares of Ericsson gained 1.9 percent to 86.90 kronor at the close in Stockholm, giving the company a market value of 286 billion kronor ($33 billion). Cisco fell 1.3 percent to $28.08 at 12:07 p.m. in New York. The announcement sent Cisco rival Juniper Networks Inc. tumbling. That stock fell as much as 9.4 percent, on course for its worst day of trading since July 2014.
The tie-up will help the two companies gain the advantages of scale without the complications of a large merger, Cisco Chief Executive Officer Chuck Robbins said in an interview with Bloomberg Television.
“We have always said there will be brutal consolidation and we are seeing that as we speak,” Robbins said. “We don’t believe these larger mergers work that effectively. We think the strength of our partnership will allow us to be in market with our customers, helping them move more effectively and quickly. ”
Ericsson and Cisco will work together to develop future technologies for markets such as cloud computing and the Internet of Things -- the concept of everything from traffic lights to refrigerators being connected through networks. Ericsson will receive patent license fees from Cisco, and also expects savings of 1 billion kronor in 2018 from the pact.
The network-equipment industry has consolidated as phone carriers have curbed spending amid saturating markets. Nokia agreed to take over Alcatel-Lucent in April, after years of deal-making in the industry that included Nokia combining its networks business with that of Siemens AG and France’s Alcatel SA acquiring Lucent Technologies Inc.
Cisco and Ericsson, meanwhile, have shied away from major mergers in favor of smaller purchases to add specific technologies and products.
“I don’t believe in big mergers -- this is by far the best solution you can get,” Ericsson CEO Hans Vestberg said in a phone interview. “This is much faster and more efficient."
Ericsson will benefit as it can reduce spending on developing its own Internet-routing products, said Sebastien Sztabowicz, an analyst at Kepler Cheuvreux with a hold rating on Ericsson shares. Still, partnerships in the network industry have rarely been successful and Ericsson could have generated more value by acquiring Juniperinstead, he said in a note to clients.
Ericsson said Centerview Partners provided advice on the partnership.
--With assistance from Erik Schatzker, Stephanie Ruhle and David Westin in New York and Ian King in San Francisco.
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