By Helena Soderpalm and Supantha Mukherjee
STOCKHOLM (Reuters) - Ericsson (BS:ERICAs) has agreed to buy U.S.-based wireless networking company Cradlepoint in a $1.1 billion deal, the Swedish telecoms gear maker said on Friday, as part of plans to expand its 5G-related products for business customers.
The deal, Ericsson's largest in more than a decade, would give it access to tools that can connect devices using the so-called Internet of Things over a 4G or a 5G network.
"We think this will give our customers a chance to generate new income sources within the enterprise segment," Ericsson finance chief Carl Mellander told Reuters.
Ericsson plans to sell Cradlepoint products to its mobile operator customers, who can create new revenue streams by selling it to their business clients.
Cradlepoint, which will become a subsidiary of Ericsson, sells routers and a subscription-based wireless networking service.
A rival of Cisco (NASDAQ:CSCO), Cradlepoint had sales of 1.2 billion crowns ($137 million) in 2019, with a gross margin of 61%. Ericsson estimates that Cradlepoint's revenue will be about 1.6 billion crowns this year.
"The acquisition is expensive, but the price tag is tolerable given high underlying growth rates and Ericsson's potential for revenue expansion in the enterprise market," said Societe Generale (OTC:SCGLY) analyst Aleksander Peterc.
While Cradlepoint has mostly focused on the U.S. market, Ericsson aims to take the products outside North America and plans to keep it as a standalone business with its own sales team.
"Where we have struggled in the past is when we have started to integrate on the sales side. That's when you lose track of all your go-to-market channels and customer interactions," said Ericsson CEO Borje Ekholm.
Ericsson's last big deal was in 2007, when it bought data network equipment vendor Redback Networks for $2.1 billion.
The transaction, which is expected to close before the end of this year, will dent Ericsson's operating margins by about 1% in 2021 and 2022. The company expects the takeover to start contributing to operating cash flow from 2022.
Ericsson said its 2022 group financial targets remain unchanged.