Ericsson deal sign of 'Net video growth

LM Ericsson's plan to buy Redback Networks Inc. for $2.1 billion is a sign of how the popularity of Internet video is expected to drive demand for broadband network upgrades.

San Jose-based Redback makes so-called "edge" routers, which are used to link homes and businesses to the Internet and are increasingly being used to simultaneously handle data, voice and video downloads. Stockholm-based Ericsson is the world's largest maker of mobile phone networks.

"This is an important strategic acquisition for us to quickly be able to offer our customers new intelligent network solutions for Internet traffic," Ericsson Chief Executive Carl-Henric Svanberg was quoted as saying in Stockholm by news agency TT.

Shares of Ericsson rose 1.5 percent to 27.95 kronor ($4.07) in trading Wednesday in Stockholm. Shares of Redback jumped $3.83, or 18 percent, to $25, in afternoon trading on the Nasdaq Stock Market.

Analysts said the all-cash deal announced late Tuesday reflects a growing need among service providers to upgrade their networks not only to accommodate bandwidth-devouring traffic but also deliver it to cell phones and other mobile devices.

Redback Chief Executive Kevin DeNuccio agreed the deal will allow both companies to capitalize on the need of Internet providers and telecom companies to upgrade their networks to handle the massive bandwidth requirements of such services.

"It's a huge market for the routing technology necessary to build out these networks, and it's really video driving the need for the infrastructure changes," he said in an interview. "I don't view this as an ending, I view it as a perfect match of the key technologies that will be necessary in the future."

Ericsson is paying about $25 (per Redback share, an 18 percent premium over Redback's closing price Tuesday on the Nasdaq Stock Market. The deal is Ericsson's biggest purchase since buying Britain-based Marconi for $2.1 billion in January.

Anders Berg, a Stockholm-based analyst at EQ Bank, said it was a good deal, fitting well into Ericsson's product portfolio and "in line with the (Internet Protocol) initiatives it is trying to roll out."

Berg said the price might seem somewhat on the high end, "but you often have to pay for quality and it's definitely quality."

The deal is expected to be completed in early 2007. Redback's management team will stay in place, and the company will operate as a wholly owned subsidiary of Ericsson.

Redback has about 800 employees, and DeNuccio said no layoffs were planned.

"This is not about cost synergies, this is about growth," he said.

Stockholm-based Ericsson has about 63,000 employees worldwide.

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Associated Press Writer Louise Nordstrom in Stockholm, Sweden, contributed to this report.