A Succession Plan Gone Awry at Ericsson

Watch while a corporate drama turns into a soap opera.
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There's nothing like a juicy boardroom spat to crank up the temperature on a lousy stock a few more degrees in the midst of a hot summer.

The victim at hand is the Swedish company

Ericsson

(ERICY)

, a competitor of

Motorola

(MOT)

, which we have examined from time to time in previous

discussions (when it was at $51, thankyouverymuch). Last week, Ericsson's board bounced its new CEO after only 15 months on the job, and the chairman and former CEO stepped in to run the show. What is still not clear is what happened: Wildly different versions of what really transpired behind the scenes ran in

The Wall Street Journal

and the

Financial Times

, and the analyst community appears to be in the dark as well.

For a magnificent eight-year stretch, Ericsson's reported earnings grew an annualized 30%, propelling the company to co-leadership with

Nokia

(NOK) - Get Report

and Motorola during the worldwide boom in wireless handsets and infrastructure. But for the past 18 months, life has not been so good. Profits are down sharply, and the company has suffered several high-level executive departures.

Most worrisome, perhaps, is that as the leader in GSM cellular technology, Ericsson has been effectively trumped by

Qualcomm's

(QCOM) - Get Report

CDMA platform for the next generation of wireless technology. True, Ericsson did agree with Qualcomm earlier this year to license CDMA, thus putting a worldwide squabble over wireless standards behind them. But a quick look at their respective stock prices supports the theory that Ericsson is hitched to the wrong horse -- and it will be a long and painful struggle given Nokia's and Motorola's huge head start in CDMA. Ericsson also has a big presence in its original wireline circuit-switched business. Though traditionally strong in Europe and considered something of a cash cow, it now looks more like a dragging anchor. A

Lucent

(LU)

it isn't.

So whose fault is it? That's what makes for interesting reading. According to the

Financial Times

, Sven-Christer Nilsson was a "softly spoken" CEO who compared "unfavorably" with the aggressive style of former CEO Lars Ramqvist; he "lost the confidence of the market in what he was trying to do," and while he was "personally charming and clearly on top of the technical side of Ericsson's business, the board began to wonder whether Nilsson was the right man to lead the company into the next century." Words like "shocked" and "dismayed" in regard to investors received lots of ink in the piece, as Ericsson was marked down nearly 10% after the announcement. In other words, a textbook boardroom challenge in the 1990s: An impatient board, frustrated by poor near-term results and the relative success of a major competitor, pushes the CEO -- rightly or wrongly -- onto his proverbial sword.

Contrast this with

The Wall Street Journal's

version of events, which headlined the story the following day as "Ousted Ericsson Chief Took on the Boss and Failed." In this version of the tale, Ramqvist apparently got ticked off that Nilsson was questioning Ericsson's convergence/Internet/IP strategies -- which were late and haphazardly executed -- and took the strategic questions personally. According to the

Journal

, "Ramqvist had heard enough ... and sacked the man he had hand picked to succeed him."

Allow me to digress on this extremely important corporate governance issue. When it comes to retiring CEOs, should they stay on the board and be a resource for the incoming CEO, or should they clean the slate and retire for good? I personally think that when you go, you should go. Sitting around on the board second-guessing your successor and taking changes personally clearly does not promote shareholder-enhancing thinking. If the new CEO wants your opinion, I doubt there will be much trouble getting a hold of you.

What does all this mean for an investor in Ericsson -- or even a potential investor? Is this the equivalent of Motorola at 51? Probably not: While Ericsson has been a rotten laggard vs. its peers, the shares have nearly doubled from the lows of last September, so it's not like the company is being priced at garage-sale levels.

We are still working on the numbers, but our analyst's main thoughts are that: 1) CDMA rules, and 2) Ericsson has a long way to go to build its systems to the new standard. Meanwhile, being late to the convergence game is very expensive, and the mad dash of European acquisitions of U.S. data-networkers looks like panicked purchases of second-tier players.

There is also the potential for cost-cutting and margin improvement here, on top of which is a company in an industry that is still growing rapidly, but that is not a foregone conclusion. Nor would I believe the unnamed analyst who was quoted in the

FT

as saying "the company is definitely in play and could attract a bid." The market cap is $58 billion, which means that the potential players are few, and given Ericsson's size and prominence in Sweden, a hostile bid would require the business-world equivalent of sending the paratroopers in to Stockholm.

Nor would this be automatically successful: Ericsson has a two-tiered equity structure, and 22% of the voting shares are owned by the investment vehicle of Sweden's Wallenberg family. As the wealthy patriarchs of Sweden, think of them as sort of a combination of

Warren Buffett

and the

Rockefeller

family.

We consider it a positive for Ericsson that the Wallenbergs have been on a recent drive to become more active in their portfolio holdings, and this appears to be another example of this activism. Whatever Ramqvist was thinking, he had to be backed by the family. And personally, that's why I go with the

Journal's

version of events.

Jeffrey Bronchick is chief investment officer at Reed Conner & Birdwell, a Los Angeles-based money management firm with about $1 billion of assets under management for institutions and taxable individuals. Bronchick also manages the RCB Small Cap Value Fund. At time of publication, RCB was long Motorola, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bronchick appreciates your feedback at

jbronchick@rcbinvest.com.