Battered Ericsson endures restructuring

STOCKHOLM, Sweden -- Two years ago, LM Ericsson was Sweden's biggest business, the main private employer, foreign exchange earner and bulwark of the stock exchange. Shares of the wireless equipment company, the world's largest, traded at $24 apiece.

Ericsson shares now trade at barely 64 cents, and company officials on an eight-nation tour are hard-pressed to sell newly issued shares priced at just 40 cents.

The downfall has wiped out nearly a decade of growth and burned thousands of investors. It has been painful not only for the 126-year-old company and its employees, but also for Swedes accustomed to basking in the image of their nation as a world technology leader.

"It's so gloomy it's almost unbelievable," Ericsson chief executive Kurt Hellstroem said recently as he and chairman Michael Treschow launched a promotion to sell $3.2 billion in new shares to current Ericsson investors in Europe and the United States.

The company hopes the stock issue generates cash to reduce debt and finance restructuring, including massive layoffs that will chop Ericsson's work force to 65,000 by the end of 2003, down from a peak of 107,000 early last year.

Executives believe they can reposition the company to weather the worldwide telecommunications recession and to grab new business when the market finally turns around.

"We are the main player. We're going to be the last one to give up," Hellstroem insisted in an interview at the company's flat-roofed, utilitarian headquarters on Telefonvaegen -- Telephone Street, where an early 20th century corner phone booth serves as the lone reminder that Ericsson helped shape the industry.

Humble beginnings

Ericsson began as an engineering workshop in downtown Stockholm, manufacturing and repairing telegraph equipment. It produced its first telephone in 1878.

These days, Ericsson has a rich basket of patents and contracts and is the market leader in wireless network equipment -- including base stations, routers and other equipment used to transmit data between wireless devices -- which represent 90 percent of sales.

But like Motorola, Nortel, Lucent and other beleaguered rivals, Ericsson has been hurt as "third-generation" mobile services haven't met expectations. Finland-based Nokia, world No. 1 in mobile handsets, is turning a profit but also announced job cuts recently.

Orders at Ericsson have declined sharply since 2000 as debt-ridden network operators have delayed upgrades. The collapse of WorldCom, a major buyer of networking gear, hasn't helped.

Ericsson lost $2.3 billion last year, its first loss ever. Then, excluding the better-than-expected operations of a joint handset venture with Sony Corp., Ericsson lost $765 million in the first half of 2002.

"If the current situation holds up and they can't reverse the outflow of cash, the company will go bankrupt fairly quickly," said analyst Richard Windsor of Nomura Group.

Junk status

Ericsson's credit rating recently was reduced to junk status by Moody's Investor Service and Standard & Poor. That will raise interest payments by about $16 million a year. Ericsson is carrying $22 billion in short-term debt.

Uncertainty is noticeable within the company.

"For many it's hard to believe in the future," said Anna-Karin Mattsson, a union representative at a business unit that laid off 650 workers this year. "The company leadership is trying to show the bright spots that do exist. But many are just waiting. They say, 'I made it this time, but what happens next time?"'

Company officials say restructuring will lower operating costs by $3.2 billion and plan on returning to profitability by late next year.

"We definitely think they have a good future ahead of them even if the next year and a half is going to be tough and they have a lot to prove," said Per Lindtorp, an analyst with Hagstroemer & Qviberg. "They must prove that they can make drastic cuts and still deliver to their customers."

Until a couple of years ago, Ericsson was considered untouchable. It accounted for one-fifth of Sweden's gross domestic product, and it had avoided being bought by global competitors, unlike such large Swedish companies as car makers Volvo, now owned by Ford Motor Co., and Saab, now held by General Motors Corp.

Today, Ericsson has a smaller market capitalization than Swedish fashion retailer H&M, and the entire Swedish telecom industry is about to be eclipsed by the forestry sector in export value terms.