The honeymoon for Ericsson’s new CEO Börje Ekholm is over. A string of bad news brought Ericsson’s shares down by 15.6%, the biggest negative reaction to a report since Q2 2002.
For the eleventh quarter in a row, turnover fell organically, now by 16% and all three of the company’s business areas Network, IT & Cloud and Media shrank. Lower software sales brought down gross margins to 30%, adjusted for structural costs – the lowest level for a second quarter during the 2000s and for the third quarter in a row the company reported an operating loss, this time of 1.2 billion kronor.
CEO Börje Ekholm has said that the launch of Ericsson’s focus strategy to regain Ericsson’s leadership meant tackling costs. Now they are to be lowered by 10 billion kronor by next summer. “We need to be in more of a hurry than we previously thought. The ambition is more than those ten, but that is what we must deliver.” There will be staff cuts in Sweden and abroad.
Two major changes in the ownership of Ericsson in the past couple of years have dramatically changed the playing field in the telecoms giant and have now led chair Leif Johansson to throw in the towel.
The first incident was a shift of power at Ericsson’s principle owner Industrivärden in 2015. This change led indirectly to Christer Gardell, of Cevian Capital, seizing a chance to buy as many shares as it could in Ericsson, making it the largest owner in terms of capital. With Christer Gardell, who clearly wanted Leif Johansson out of the post of chair, at the top of the owners’ list, and a new management at Industrivärden with little sympathy for Johansson, it was difficult for even Investor to save the chair.
Leif Johansson’s time as chair of Ericsson has been a disaster in terms of the company’s progress and how the board has managed its duties. As he leaves the post an era in Swedish business comes to an end. For almost three decades he has been one of the heavyweights in Swedish business although his star status has dipped as it became clear the returns he brought shareholders were no longer in the top league.
The news that Cevian Capital has bought more than 5% of the capital in Ericsson is just further proof that Investor and Industrivärden have failed to control the telecom giant, suggests Dagens Industri. Well-run companies with an efficient structure and a competent board of directors do not receive visits from activists. No activist would dream of buying a share of Atlas Copco, or any other company in the Douglas sphere, continues the business daily.
It is quite feasible that Christer Gardell’s Cevian Capital will call for the elimination of different voting rights, which would raise the value of the company. If Christer Gardell chooses to pursue the matter, it is reasonable to assume that he will receive the backing of Industrivärden and institutional owners, thereby paving the way for a shift of power.
Börje Ekholm’s honeymoon is over. Ericsson’s new CEO has remained tight-lipped about his plans for the company, something that has surprised analysts. Several are now hoping that Börje Ekholm will present a concrete decision about the future direction of the company at Wednesday’s AGM.
The telecoms giant is facing several challenges. Ericsson is losing market share, mainly to the Chinese company Huawei, and an expensive race is underway between the world’s telecoms giants over new 5G technology. Furthermore there are unanswered questions about whether parts or the whole of Ericsson are up for sale. At the turn of the year Ericsson restructured its business areas and now consists of Networks, IT & Cloud and Media. There has been speculation that the latter two will be sold or hived off.
SvD writes that its sources have had no signals from Ericsson, which most likely means that no decisions have yet been made about the future. Daniel Djurberg, telecoms analyst from Handelsbanken, says, “My guess is that it will come before midsummer. This uncertainty is not great with as strong a competitor as Huawei. I think it has already affected the stock price.”
In 2014 a group of journalists working with the Organised Crime and Corruption Reporting Project (OCCRP) broke the story of the “Global Laundromat” – an operation whereby money was moved out of Russia between January 2011 and October 2014. Much of the money was moved out of the country via Trasta Kommercbanka in Latvia and Moldindconbank in Moldova, and investigations were subsequently launched in Latvia, Moldova, the UK and Russia.
OCCRP journalists have since gained access to information allowing investigators to track how USD 20.8 billion was moved from Russia. Detectives believe the true figure could be as much as USD 80 billion, or SKr 700 billion, according to The Guardian. As a comparison, Swedish government expenditure in 2017 is expected to be in the region of SKr 970 billion.
According to OCCRP, Sweden’s big four banks as well as Danske Bank and Norwegian DNB, are among the hundreds of banks that have processed the money. OCCRP also says that Ericsson and fastening tool company Isaberg Rapid have received money transfers of USD 1.3 billion and USD 153,000 respectively.
Ericsson says it does not normally comment individual transactions, but this was a single payment for one of its customer contracts. “We don’t know today why the payment was made by a company other than the customer, but in light of the information that has now emerged, we will take a closer look at this payment and see if we have adequate procedures and control mechanisms,” states the company.
A number of independent sources have informed Svenska Dagbladet that Ericsson is suspected of having made a number of payments via intermediaries to top executives at one of the company’s biggest customers, South African operator MTN. Ericsson is currently under investigation by the US Securities and Exchange Commission (SEC).
Ericsson spokesman Johannes Arvidson Persson tells SvD: “We cannot go into detail about the questions we have received from the US authorities and we can neither confirm nor deny individual countries or regions. We have previously said that the questions are related to the Foreign Corrupt Practices Act”.
In turn, MTN has told SvD that it is not aware of any illegal or unauthorised transactions between the companies, nor is it aware of any unauthorised exchanges or transactions between employees of MTN and Ericsson.
Ericsson has announced 820 redundancies in Kumla and Borås and it is now definite that production will end completely in Kista. Sixty employees will remain in Kumla to work on developing new 4G technology.
Anders Ferbe, chair of the union IF Metall, is critical of the decision, calling it the wrong strategy. “It is terrible that Ericsson wants to starve itself out of the problem. I had hoped that they would display more of an offensive,” says Anders Ferbe.
SvD reports that enterprise minister Mikael Damberg (S) has promised action although the details are unclear. “Unfortunately this decision was expected. But that is hardly comfort for those people and families that are affected. I now expect Ericsson to take responsibility and help employees on to their next jobs,” says Mikael Damberg.
He says that once the government knows the full extent of the redundancies they will present what they can do to strengthen the IT and telecoms cluster in Sweden.
According to a report by Swedish Radio’s news programme Ekot, in 1999 Ericsson paid 2.5 million kronor to a bank account, which was controlled by Costa Rica’s ex-president Miguel Angel Rodriguez. At the same time, the Swedish telecommunications giant was competing for a major telecoms contract in the country.
Ericsson tried to hide the payment by using a shell company and “bounced the money” through banks in three different countries before reaching an account in Panama.
Several former executives who have been promised anonymity have told Swedish Radio of similar payments made to ministers and senior managers in countries in which Ericsson wanted to obtain contracts.
Ericsson is currently facing a series of corruption probes, including in Greece and the US.
The appointment of Börje Ekholm as CEO for Ericsson last Wednesday was one of the more sensational pieces of news on the Stockholm stock market for several years. An initial gain in share price was later cancelled out due to Börje Ekholm’s decision to remain in the USA and the fact that he did not distance himself from Ericsson’s recent strategy.
DI reports that not all board members realised Ekholm would not move to Sweden, which creates problems for the board that fired Bina Chauraisa, HR director in October, because she lived in the USA and Ericsson needed someone stationed in Stockholm. Furthermore shareholders have expressed their concern about how it will work and how much time will be wasted on travel.
Furthermore in an interview with SvD chair of Ericsson’s board Leif Johansson admits that he and the board ought to have noticed Ericsson’s decline earlier. “If we had foreseen the decline that came heavily at the start of 2016 then we would have acted differently,” he says.
During their years at Ericsson Hans Vestberg and Carl-Henric Svanberg spent more than SKr 65 billion on company acquisitions, many of which were a disappointment. For example, the acquisition of US internet router maker Redback, which Ericsson bought in 2007 for SKr 13 billion was a disaster. Analysts now forecast that the telecoms giant may be forced to book a SKr 20 billion asset write down in its Q3 report, which will be published on Friday.