NEC plans overseas acquisitions in Drive for 70% profit growth

(Bloomberg) — NEC Corp., after several years of record acquisitions, plans to buy more foreign companies to expand its portfolio of services that help governments and businesses digitize their operations.

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Acquisitions will focus on the United States and Europe, while expansion in Asia can come from organic growth, chief executive Takayuki Morita said in an interview. NEC is looking to complement its digital government and financial offerings and could also buy companies that have 5G wireless network expertise, Morita said.

The Tokyo-based company is counting on demand from governments, financial institutions and telecom operators to help it add 500 billion yen ($4.5 billion) to its revenue and boost its profit by of nearly 70% over the next five years. NEC agreed last October to pay $2.2 billion for Swiss banking software developer Avaloq Group AG, its biggest acquisition ever. It bought Denmark’s KMD Holding ApS for $1.2 billion and bought public sector software developer Northgate Public Services in the UK, both in 2018.

“It won’t be enough,” Morita said. “As NEC’s stamina and portfolio permit, we will continue to pursue M&A opportunities that do not harm our financial position.”

The pandemic has done little to depress valuations for potential acquisition targets and NEC would have to exercise judgment to get a good deal, including not paying a premium, Morita said. To prevent rivals from driving up prices with counter-offers, NEC aims to complete the purchases within two months of doing its due diligence, he said.

In May, NEC was targeting 3.5 trillion yen in revenue for the year ending March 2026, a 17% increase from last fiscal year. Sales in the digital government and finance segment will climb more than 50% over the period to 300 billion yen, with acquired businesses driving most of the growth.

“Expanding their digital transformation offerings is key to achieving these medium-term goals,” said Ian Ma, senior associate analyst at Bloomberg Intelligence. “And it’s pretty certain that a lot of that will have to come from acquisitions.”

NEC is also betting on adopting 5G wireless technology known as Open Radio Access Network, or O-RAN, an interoperability standard for cellular base station designs. The company expects sales in the 5G sector to more than quintuple to 190 billion yen in fiscal 2025 and aims for a 20% share of the still nascent O-RAN market by 2030.

“Being able to move first is very critical in this industry,” Ma said. “Many telecom operators will make their commitments to this technology over the next couple of years. Once they have chosen a supplier, they are unlikely to change.

The company has partnered with Rakuten Group Inc., the newest entrant to the Japanese wireless market and O-RAN champion, and Nippon Telegraph & Telephone Corp. European giants Vodafone Group Plc and Deutsche Telekom AG have also tapped NEC to supply 5G radio units. , while Spain’s Telefonica SA is using its equipment to conduct O-RAN trials in four countries.

This next-generation equipment promises higher capacity, lower data transport costs and lower power consumption than conventional network infrastructure. But the challenge is to create a seamless system that combines interoperability and performance while lowering the total cost of ownership for operators, Morita said.

“Open RAN technology is just beginning to be recognized around the world for its practicality,” he said. “The market will start to develop from 2022-2023.”

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