Ericsson Acquires Vonage; Emphasizes Communications APIs Over UCaaS -

Swiss telecom equipment giant Ericsson is acquiring U.S. VoiP and cloud communications service provider Vonage for $6.2 billion. The deal's valuation is a lofty 31.6 times adjusted EBITDA, according to quick ChannelE2E math based on various Ericsson and Vonage financial disclosures today.

This is technology M&A deal number 731 that ChannelE2E has covered so far in 2021. See all technology M&A deals for 2021 and 2020 listed here.

Why Ericsson Wants Vonage Communications APIs

At first glance, this looks like another Unified Communications as Service (UCaaS) M&A deal -- which is a hot investor segment at the moment. But take a closer look, and the Vonage buyout appears more focused on APIs (application programming interfaces).

Indeed, the cloud-based Vonage Communications Platform (VCP) serves over 120,000 customers and more than one million registered developers globally. Associated APIs (application Programming interfaces) allow developers to embed messaging, voice and video into applications, Ericsson indicated. That API focus is of particular interest to Ericsson, which is striving to make software and ecosystem integrations the secret sauce of 5G network build-outs.

Among the deal details to note:

Vonage will become a wholly owned subsidiary of Ericsson and will continue to operate under its existing name.

Vonage CEO Rory Read will join the Executive Team of Ericsson, reporting to President and CEO, Börje Ekholm.

Vonage is headquartered in Holmdel, New Jersey in the United States with 2,200 employees throughout the United States, EMEA and APAC.

It sounds like some Vonage layoffs could be coming, base on a "cost synergy" statement mentioned in the press announcement, ChannelE2E believes.

Ericsson Acquires Vonage: The Deal's Valuation and Financial Math

Ericsson appears to be paying a big financial premium to acquire Vonage. Among the key performance indicators to note:

Vonage sales were USD $1.4 billion in the 12-month period to 30 September 2021;

adjusted EBITDA margin for the period was 14% and free cash flow was USD $109 million.

Based on those KPIs, quick math suggests Vonage's adjusted EBITDA was $196 million (our math: $1.4 million X 14%) for the 12-month period.

So the deal's valuation is therefore a lofty 31.6 times adjusted EBITDA (our math: $6.2 billion / $196 million).

Ericsson pointed to Vonage's expected business growth, perhaps in an effort to explain the lofty premium. The buyer noted that VCP:

accounts for approximately 80% of Vonage’s current revenues;

delivered revenue growth in excess of 20% in the three-year period to 2020;

delivered adjusted EBITDA margins moving from -19% in 2018 to break-even in the 12-month period to 30 September 2021.

Looking ahead, Vonage’s management team projects annual growth of over 20% for VCP in the coming years -- though an exact timeframe was not mentioned.

Meanwhile, Ericsson's core business has been striving to pivot toward cloud, software, 5G and recurring revenue opportunities. But the transformation required massive Ericsson job cuts, which were announced in 2017.

Ericsson Acquires Vonage: Executive Perspectives

In a prepared statement about the deal, Ericsson CEO Börje Ekholm said:

“The core of our strategy is to build leading mobile networks through technology leadership. This provides the foundation to build an enterprise business. The acquisition of Vonage is the next step in delivering on that strategic priority. Vonage gives us a platform to help our customers monetize the investments in the network, benefitting developers and businesses. Imagine putting the power and capabilities of 5G, the biggest global innovation platform, at the fingertips of developers. Then back it with Vonage’s advanced capabilities, in a world of 8 billion connected devices. Today we are making that possible.

Today Network APIs are an established market for messaging, voice and video, but with a significant potential to capitalize on new 4G and 5G capabilities. Vonage’s strong developer ecosystem will get access to 4G and 5G network APIs, exposed in a simple and globally unified way. This will allow them to develop new innovative global offerings. Communication Service Providers will be able to better monetize their investments in network infrastructure by creating new API driven revenues. Finally, businesses will benefit from the 5G performance, impacting operational performance, and share in new value coming from applications on top of the network.”

Added Rory Read, CEO of Vonage:

“Ericsson and Vonage have a shared ambition to accelerate our long-term growth strategy. The convergence of the internet, mobility, the cloud and powerful 5G networks are forming the digital transformation and intelligent communications wave, which is driving a secular change in the way businesses operate. The combination of our two companies offers exciting opportunities for customers, partners, developers and team members to capture this next wave. We believe joining Ericsson is in the best interests of our shareholders and is a testament to Vonage’s leadership position in business cloud communications, our innovative product portfolio, and outstanding team.”

For Ericsson, the acquisition builds on the success of the integration of Cradlepoint in September 2020. Cradlepoint has continued to develop strongly under Ericsson’s ownership.