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Avaya bids $US475m for Nortel's IP telephony & UC arm

July 21, 2009 | Chris Payatagool

Thumbnail image for avaya_logo.jpgby Stuart Corner    

Avaya has bid $US475m for substantially all of the assets of Nortel's Enterprise Solutions business globally along with shares in Nortel Government Solutions Incorporated (NGS) and DiamondWare Ltd.

Like Nokia Siemens offer for Nortel's CDMA and LTE business, the offer is structured as a 'stalking horse' bid, creating the option for the bankruptcy court to solicit better offers from other bidders. And according to a blog posting from Allan Sulkin, president and founder of TEQConsult Group, "Siemens/Gores Group is still not out of the picture. The Siemens internal message issued to employees does not cede Nortel ES to Avaya, leaving open the possibility it could still outbid Avaya."

(Meanwhile The Wall Street Journal is reporting that Silver Lake Partners, the private equity firm that owns Avaya, is once again interested in buying Tandberg A Silver Lake-Tandberg deal was rumoured just under a year ago.)

Nortel claims the offer comes at a time when customer service levels at multi-year highs. Nortel CEO, Mike Zafirovski, said the deal "represents the best path forward, and we are advancing in our discussions with interested parties for our other businesses...Today's agreements underscore the value of Enterprise Solutions and the investments we have made in enterprise telephony, unified communications and data networking core competencies. If successfully completed, this transaction will provide clarity on the path forward for our enterprise customers, partners and employees, and enable the industry to continue to benefit from Nortel-created technology, know-how and leading-edge innovation."

According to Avaya president and CEO, Kevin Kennedy, "The addition of Nortel Enterprise Solutions will increase Avaya's global scale, expand our channel partner network and strengthen our world-class portfolio of products and services. This is a strategic opportunity to acquire talent and complementary assets that position the combined company for growth and success."

However there are potential complications: Nortel has a close relationship with Microsoft, the innovative Communications Alliance into which it poured a great deal of product development effort, and there is no certainty that either Avaya or Microsoft would want to continue this following any acquisition.

Commenting on the offer on his blog site, Zeus Kerravala, SVP enterprise research at The Yankee Group said: "[$US475m] is about half of this year's predicted revenue. This may seem high considering the lack of profitability from Nortel but you can bet Avaya will squeeze much of the excess fat off of the Nortel bone and have it be profitable sooner than later."

He added; "This type of consolidation is good for the industry and has been happening over the past few years with NEC acquiring Sphere, Mitel purchasing InterTel, Ericsson selling its enterprise assets to Aastra, Avaya buying Ubiquty, etc. There are simply too many vendors for this market to support...The combined organisation will be the undisputed number one voice vendor. Based on my quick calculations, I believe Avaya and Nortel will be conservatively 25 percent of the overall voice market (not just VoIP but all voice) with Cisco being number two  with 16 percent... Avaya has done an excellent job in converting its own base to VoIP but hasn't been able to attract many new customers.

"This gives Avaya many new enterprise customers as well as government institutions to sell into. Additionally, Nortel helps Avaya expand its channel by adding some systems integrators and service providers that Avaya does not have right now. So more customers and broader channel, definitely something Avaya would have been challenged to grow organically."

He predicted that the deal would benefit customers of both companies. "For the Nortel customer base there's finally closure to the long period of uncertainty. The product strategy from 'Norvaya' won't be substantially different than Nortel alone in that real time communications is core to mission. For the Avaya customer base, the benefits will come down the road when a bigger Avaya is better able to compete and then further re-invest R&D dollars.

"The long term determination of whether this was a good deal or not will be based on how many of the channel partners Avaya can retain and how many customers it's able to flip before Cisco, Microsoft and the other companies come knocking with great deals on Nortel replacement products."

In the US and Canada the transaction is subject to a competitive bidding process and requires the approval of the United States Bankruptcy Court for the District of Delaware and the Ontario Superior Court of Justice. Avaya expects that hearings before those courts to approve bidding procedures will be held within the next couple of weeks, followed by an auction, with hearings for approval of the ultimate sale to be held thereafter.
In EMEA, Avaya has entered into an agreement with the Joint Administrators, on behalf of the EMEA entities for which they have been appointed and the transaction is subject to information and consultation with employee representatives and approval of the courts in France and Israel.



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