Skip to content

Industry Insight: Ericsson to Acquire Vonage

Share:

Ericsson has just announced its acquisition of Vonage, valuing the latter at an enterprise value of around $6.2b. This is clearly a push into the enterprise and communications applications programming interface (API) markets, partly driven by activist shareholders who are hankering for growth. 

But is Ericsson paying a steep price for Vonage? Danske Bank seems to think so. Many analysts predict that the Communications Platform as a Service (CPaaS) market will experience high growth rates, but even so, is the valuation justified? Looking at it from a free cash flow, price-to-sales, or price-to-EBITDA perspective, the acquisition does not look cheap once we factor in the CPaaS market dynamics. Incidentally, Ericsson’s share price was down yesterday — perhaps financial markets were either skeptical or failed to comprehend the deal. 

Vonage’s current annual revenue is around $1.4b compared to Ericsson’s at ~$26b. To be sure, the worldwide CPaaS revenue is expected to grow at a rapid clip in the near term (although research firms’ forecasts do vary greatly, underlying the uncertainties) but can contributions from CPaaS nudge Ericsson’s revenue and profit needle significantly enough, and how soon?

The CPaaS market is highly competitive. Certainly, the likes of Twilio, Microsoft, and Cisco together with a whole host of smaller players will not be sitting idle and twiddling their thumbs. Ericsson will have to quickly demonstrate that it can further strengthen Vonage’s current market position. According to Statista data1, Vonage has a 11.8% market share of the worldwide CPaaS market in 2Q 2021. 

Ericsson mentions the importance of advanced APIs in new use cases such as remote health, AR/VR, real-time gaming, connected vehicles, and remote health. It is not wrong. There are attractive opportunities over the longer term. However, basic messaging is still expected to remain as the largest CPaaS component (albeit a declining one) for the next 3–5 years or so.

Ericsson also attempts to establish a link between communications APIs and 5G. In my opinion, this linkage with 5G is unconvincing. It is fair to ask if it is a red herring. In truth, the size of demand for 5G-related network APIs is unclear among application developers. Growing this market may require much work. If synergies are really apparent and constitute a pivotal argument in favour of this acquisition, it is puzzling that upon completion of the deal, Vonage will remain as a wholly-owned subsidiary with separate reporting. 

Final Thoughts

So far as this deal is concerned, a healthy dose of skepticism is not out of place. The CPaaS market will certainly grow and it can be an enticing opportunity for network equipment providers. However, it is also a highly competitive market that is expected to evolve at a much faster pace than that of traditional network infrastructure market. The onus is on Ericsson to demonstrate that this acquisition will work as advertised.

1 See Communications platform as a service (CPaaS) market share by vendor worldwide in Q2 2021, Statista

Opinions expressed in this article are those of the contributing analyst and not that of neXt Curve.

This material may not be copied, reproduced, or modified in whole or in part for any purpose except with express written permission or license from an authorized representative of neXt Curve. In addition to such written permission or license to copy, reproduce, or modify this document in whole or part, an acknowledgement of the authors of the document and all applicable portions of the copyright notice must be clearly referenced.

If you would like to engage with a neXt Curve analyst on this topic, please:

If you would like to be notified of our latest research by email, please:

Related Content

Subscribe to neXt Curve!

By subscribing to the neXt Curve site you will registered with our reThink research blog and have an opportunity to engage with one of the most vibrant and independent discussions on our digital future. As a subscriber, you will receive newly published research articles and content as well as invitations to exclusive events by mail.

By subscribing you acknowledge and accept the terms of neXt Curves privacy policy.

Request an Inquiry

Send us an email

Request a Briefing