NEC Plans Overseas Acquisitions in Drive for 70% Profit Growth

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

The acquisitions will focus on the U.S. and Europe, while expansion in Asia can come from organic growth, Chief Executive Officer Takayuki Morita said in an interview. NEC is looking to add to its digital government and finance offerings and may also purchase companies that have 5G wireless network expertise, Morita said.

The Tokyo-based company is counting on demand from governments, financial institutions and telcos to help it add 500 billion yen ($4.5 billion) to its revenue and grow operating profit by nearly 70% over the next five years. NEC last October agreed 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 purchased public sector software developer Northgate Public Services in the U.K., both in 2018.

“These won’t be enough,” Morita said. “To the extent NEC’s stamina and wallet allow it, we will continue to look for M&A opportunities that do not impair our financial standing.”

The pandemic hasn’t done much to dent valuations of prospective acquisition targets and NEC would have to exercise careful judgment to get a good deal, including not paying a premium, Morita said. To prevent rivals from driving up prices with counter bids, NEC aims to complete purchases within two months after doing due diligence, he said.

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

“Expanding their digital transformation offerings is key to hitting those mid-term goals,” said Ian Ma, senior associate analyst with Bloomberg Intelligence. “And it’s pretty much a given a lot of that will have to come from acquisitions.”

NEC is also betting on the adoption of 5G wireless technology known as open radio access network, or O-RAN, an interoperability standard for cellular base station designs. The company forecast sales in the 5G business will climb more than fivefold to 190 billion yen in fiscal 2025 and targets 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 telco carriers will be making their commitments to this technology over the next two year. Once they pick a vendor, they are not likely to change.”

The company has partnered with Rakuten Group Inc., the newest entrant in Japan’s wireless market and a champion of O-RAN, 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 gear to conduct O-RAN trials in four countries.

This next-generation gear promises higher capacity, cheaper data transport costs and lower power consumption than conventional network infrastructure. But the challenge is in creating a seamless system that combines interoperability and performance while reducing the total cost of ownership for carriers, Morita said.

“The Open RAN technology is just beginning to get worldwide recognition for just how practical it is,” he said. “The market will start to expand from 2022-2023 on.”

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