Telecoms investors are not fans of derring-do. Ericsson alas missed the memo and spiced up its first-quarter results with tales of corruption and international terrorist organisations.
The Swedish equipment maker admitted on Thursday that fines would follow earlier revelations that it possibly paid Isis in Iraq for access to its territory. That, combined with a poor operating performance, prompted investors to tune out, sending shares down 5 per cent.
They are right to be nervous. US regulators are keen to throw the book at foreign corruption. Ericsson was in hot water with the US Department of Justice for similar reasons as recently as 2019. Outsized penalties then — more than $1bn in fines for bribes of $62mn that yielded $427mn in illicit profits — are part of a trend. Airbus received a record $4bn penalty for its unlawful activities not long after. Since the revelations emerged in February, almost $10bn has been scythed off Ericsson’s market value.
At first sight, that appears overdone given the scale of the Iraq bribes. Based on similar terms to 2019, Ericsson’s latest penalty for misconduct could come in at $440mn. That assumes a 9 per cent margin on all $1.9bn of sales made in Iraq between 2011 and 2018.
Of course, other factors are behind the sell-off, not least the broader market rout over the fallout from Russia’s invasion of Ukraine. Operational woes add to the malaise. First-quarter profits flunked analysts’ expectations because of charges from exiting Russia and a revaluation of venture investments. More cheer applied to the top line. Strong sales in Europe, up 18 per cent year on year, showed Ericsson continuing to take share from the heavily blacklisted Huawei of China.
Do not expect a return to ho-hum statements and a reversal of a falling share price any time soon. US regulators are zealously pushing back against foreign corruption. The DoJ will be asking hard questions as to why the Iraq sales did not surface during its previous investigation. Simultaneous breaches of the rules is unprecedented. The size of consequent enforcement action may prove to be similarly without precedent.