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LM Ericsson Telephone Company (ERIC - Analyst Report) and STMicroelectronics (STM - Snapshot Report) recently decided to split their joint venture ST-Ericsson. Both the companies announced in Dec 2012 that they are assessing the future of their joint venture.

Both Ericsson and STMicroelectronics have finally come up with a decision that is profitable as well as strategically sound for both the companies. Subject to regulatory approvals, the decision to split the joint venture will be completed by the end of the third quarter of 2013.    

As per the terms of the agreement, Ericsson will take on the design, development and sales of the LTE multimode thin modem products, including 2G, 3G and 4G multimode. STMicroelectronics will be taking over the existing ST-Ericsson products and related business including certain assemblies and test facilities. After the spin off, Ericsson will have 1,800 employees and contractors while STMicroelectronics will have 950 employees. 

Ericsson believes that thin modems have a strategic importance in the wireless industry. By taking over the LTE thin modem products, Ericsson plans to create an extremely focused "thin modem only" operation.

Both Ericsson and STMicroelectronics have invested huge amount to establish industry leading technology and Intellectual Property. After preliminary customer interaction, management at Ericsson is confident that thin modems will meet the requirements of the manufacturers in the fast growing smartphone and tablet markets.

While for STMicroelectronics, the split signifies a major step ahead in achieving its new financial model target, thereby allowing STMicroelectronics to strengthen its capabilities to fuel future growth in specific key product areas.

Furthermore, with the transfer of competencies from ST-Ericsson, STMicroelectronics will strengthen its skills in the areas of application processors, RF, analog and power including software and complex system integration. Apart from this, ST-Ericsson joint venture portfolio also includes devices that are a strategic fit for STMicroelectronics focus on the rapidly growing segments of the wireless semiconductor market.

Overall, the decision to split the joint venture is in accordance with STMicroelectronics’ financial model target, with an operating margin target of above 10% and with a policy to cut down the quarterly operating expenses to an average quarterly rate range of $600 million to $650 million by the beginning of 2014.

Ericsson currently has a Zacks Rank #2 (Buy) similar to other players in the same industry such as Juniper Networks, Inc (JNPR - Analyst Report) and Qualcomm Incorporated (QCOM - Analyst Report) both having Zacks Rank #2 (Buy).

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