Ericsson, the telecom equipment giant, has announced a significant impairment charge of $1 billion related to its acquisition of cloud communications firm Vonage in 2021, leading to a 2% decline in its shares during early trading.
The acquisition, heralded as one of Ericsson’s largest deals to date, saw the company invest $6.2 billion in cash to bolster its presence in the enterprise customer segment, aiming to diversify away from its traditional mobile networks business.
However, Ericsson has faced challenges since the acquisition. Declining revenues from its mobile network sector, exacerbated by reduced demand for 5G equipment, have taken a toll. Additionally, the company’s share price has been halved following a scandal involving alleged bribes in Iraq. Last year, Ericsson also incurred a $3 billion non-cash charge related to the Vonage acquisition.
“Given the deteriorating market environment and strategic decisions to reallocate investments to priority areas, we have revisited certain growth assumptions, resulting in a non-cash impairment of 11.4 billion Swedish crowns ($1.1 billion),” explained Vonage CEO Niklas Heuveldop, who assumed the role in February.
Vonage continues to operate as an independent entity under Ericsson’s umbrella.
Initially expected to enhance earnings per share and boost free cash flow starting in 2024, the Vonage acquisition has seen substantial write-downs totaling $4 billion, representing approximately two-thirds of its purchase price.
Ericsson had paid a significant premium of $21 per outstanding Vonage share, a move analysts deemed lofty at the time, offering a 28% premium over the stock’s previous closing price and 34% over its three-month average.
“This confirms the assessment that Ericsson may have considerably overpaid for the unit in 2021,” commented Mads Lindegaard Rosendal, analyst at Danske Bank Credit Research.
