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New Ericsson Man Has Tough Lock to Pick

While many of the tough decisions have been made, Carl-Henric Svanberg inherits a company in crisis.
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Updated from 8:13 a.m. EST

Whether a former lock-manufacturing executive can free

Ericsson

(ERICY)

from its stock market shackles remains unclear, but telecom newbie Carl-Henric Svanberg will certainly have his work cut out for him.

Until Thursday, Svanberg, 50, was known as the CEO of a well-regarded and profitable lockmaking company,

Assa Abloy

. He will take the reins from 18-year veteran Kurt Hellstrom at the world's largest wireless telecom-gear maker in early April, the company announced this morning.

Hellstrom, who reached the early retirement age of 60, had approached the board to relinquish his role last October. It unanimously chose Svanberg as his successor, making him the fourth new CEO in five years.

Svanberg joins a company in the middle of a painful transition. Ericsson has been criticized since last year for failing to react to a contracting market for wireless infrastructure gear before it was too late. On Monday, the company reported a disappointing fourth-quarter loss and said sales would fall another 15% this year. Its stock lost one-quarter of its value on the news.

Luckily for Svanberg, most of the painful decisions have already been made. Since last year, the firm has aggressively slashed costs and headcount with hopes of reaching profitability this year. The company now employs about 64,000 people, down from 140,000 two years ago, with another 4,000 more layoffs planned this year. The company's chairman, Michael Treschow, called it the "biggest restructuring in modern time."

"It's too early to say what possible changes there are," Treschow told analysts on a morning call announcing the new executive. "The marching order is don't change: the target is to

get back to profitability as soon as possible. The focus is profit, profit, profit."

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Is Svanberg up to the task?

One early observation: He certainly knows how to make an entrance, a trait somewhat lacking in his predecessor, say observers. Ericsson said the incoming chief is prepared to snap up 100 million kronor ($11.8 million) worth of Ericsson class B shares at going market rates from two unidentified investors. He'll pay out of his own pocket, which forces him to sell some of his current assets, according to executives. Ericsson will not provide a loan, nor is the company "involved," said Treschow.

Wall Street and investors initially cheered the news of a management shakeup, hoping the new CEO will do something to the recent clunker of a stock. Ericsson's American depositary receipts rocketed up 62 cents, or 9.23% to $7.34, amid an overall slump in the U.S. markets this morning.

"Ericsson was trading on a discount vis-a-vis the

Lucents

and

Nortels

of the world," said SoundView Technology wireless equipment analyst Matt Hoffman, who has a neutral rating on the stock. "A change in the management of the No. 1 franchise is a good thing for investors. Whether it makes up the valuations gap, we're not sure. But it's certainly making a move today." SoundView has no investment banking relationship with Ericsson. Hoffman, who spent three-and-a-half years at Ericsson ending in 1998 as a market researcher, owns shares in the company.

The accolades poured in. "We are initially encouraged by the management shuffle as Ericsson's recent troubles have been both a function of general market doldrums and of poor management execution, in our opinion," said Bear Stearns wireless equipment analyst Wojtek Uzdelewicz in a note. "While this new CEO remains unproven in terms of running a telecom business, we are encouraged that Ericsson hired someone from outside and our initial checks indicate Svanberg has an excellent reputation."

Svanberg's "tenure has been marked by solid EPS growth and good communication with the investor base," wrote Lehman Brothers analyst Tim Luke, "although we note that he does not have prior experience with the telecom industry."

Company observers are hoping the new CEO will be everything Hellstrom was not. In particular, while Hellstrom was well-regarded as a master salesman of the company's sprawling portfolio of communications products, observers said he lacked media savvy and couldn't inspire the confidence Wall Street depends on in times of crisis.

"Kurt's a good guy but a bit more humble than the CEOs we're used to in the States," said SoundView's Hoffman. "What he wasn't as comfortable with was the media and the Street handholding you have to do as a CEO."

With the restructuring in place, Wall Street hopes Svanberg will oversee Ericsson's return to past glory.

"We'll have to wait and see what's the direction for the company in the new regime," said Hoffman. "We don't think there will be a wholesale change, but hang on."