Unpacking Ericsson's acquisition of Cradlepoint

• On September 18th, 2020, Ericsson, the Swedish mobile communications networking giant, announced plans to acquire Cradlepoint for a stated purchase value of $1.1 billion. The valuation, at a hefty 10x of Cradlepoint’s 2019 reported revenues of $137 million is a pretty hefty price for Ericsson to pay, with available cash, especially when considering they expect the acquisition to be dilutive until 2022 at least.

• Seen another way, the acquisition and healthy valuation is a reflection of Cradlepoint’s growth story reaching an inflection point, the company’s healthy gross margins, its pivot a cloud-based subscription business model, and lastly, its strength in the crucial North American region amongst its core enterprise customer segment. Indeed, Cradlepoint has over 20,000 customers, 1500 channel partners, and over 1 million SaaS subscriptions.

• The deal is a win-win for both parties and puts the focus on the emerging market for wireless equipment and software at the network edge, cements Ericsson’s continued shift into the enterprise market, and is validation for the success of Cradlepoint’s business model to date.

• In theory, Cradlepoint can become the tip of the proverbial spear for Ericsson’s attempts to make inroads into enterprise spending on the extended, “wireless WAN” and “wireless edge”, with pull-through for Ericsson’s IoT, small cell, and enterprise private network products.

• The acquisition has shone a light on an emerging segment in enterprise spending. Namely, the emerging market for wireless equipment and software at the edge of the Wide Area Network (WAN). Traditional WAN deployments have operated on fixed-line network architectures, with a hub and spoke model between the company headquarters and branch locations. However, as companies grew their businesses and increasingly looked at digital transformation as a driver of productivity and collaboration, it was quickly apparent that connecting all the branches and employees to enterprise software and applications would be challenging and prohibitively expensive. This is where cellular technologies have begun to get a foothold in the WAN and is the area that Ericsson is increasingly orienting towards and the Cradlepoint acquisition cements Ericsson’s continued shift into the enterprise market.

• As the Covid19 pandemic continues to disrupt the “future of work”, work from home (WFH) models are increasingly taking root with massive implications for the reach of the enterprise WAN. Put simply, enterprises need to enable their employees to be able to work from any location, at the office, home, or external site, give them access to the entire suite of corporate applications and ensure reasonable bandwidth and security. In the “new normal”, the only practical and cost-effective way to enable this new paradigm is to enable cellular access to the WAN.

• Despite reiterating its commitment to the CSP-driven go to market channel and synergies with Cradlepoint in this regard, the deal is effectively an acknowledgment by Ericsson that the CSP channel is not quite mature and it needs a more “direct” channel to enterprise customers. This is specifically true for the medium and SMB enterprise segments, where the diversity of business segments and operating models require levels of domain expertise and/or business model flexibility that large CSPs are not built to cater to.

• The North America region is crucial for the success of Ericsson’s enterprise ambitions, and the company was not in the same weight class as larger rivals like Cisco or established vendors like Ruckus Wireless, Sierra Wireless, and others.