Avaya Wins the Auction for Nortel’s Enterprise Solutions Business

Today, September 14, 2009, Nortel Networks Corporation (Nortel) announced that “it, its principal operating subsidiary Nortel Networks Limited, and certain of its other subsidiaries, including Nortel Networks Inc. and Nortel Networks UK Limited, have concluded a successful auction of substantially all of the assets of Nortel’s global Enterprise Solutions business as well as the shares of Nortel Government Solutions Incorporated and DiamondWare, Ltd. Avaya Inc. (Avaya) has emerged as the winning bidder agreeing to pay US$900 million in cash to Nortel, with an additional pool of US$15 million reserved for an employee retention program.  

The sale is subject to court approvals in the U.S., Canada, France and Israel as well as regulatory approvals, other customary closing conditions and certain post-closing purchase price adjustments.” 

Both the press release and the comments provided by Joel Hackney, President of Nortel Enterprise Solutions, on the analyst call this morning described the event as “a very exciting day in the history of Nortel”, “a historic moment” and “a big day for us [Nortel]”.  These claims seem to be based on the anticipation that the deal will provide existing and potential [Nortel] customers with investment protection.  The deal is expected to close by the end of the year. The finalization of the bidding process, which started last Friday, took, in fact, three days and was described as “a very productive process” demonstrated by the almost doubled price compared to the original stalking-horse bid placed by Avaya earlier this year. The names of the other two bidders were not disclosed, but the Nortel spokespeople noted that Avaya’s advantage as the stalking-horse bidder was primarily in the ability to gain a head start on integration planning.  

Much has been said about the potential advantages and disadvantages of this transaction. As I go over my previous post on this subject matter (please see further below on http://www.sipthat.com), I feel that most of my earlier thoughts on the then potential merger are still valid.  

The one important aspect that has changed, however, is the price. As mentioned, it has almost doubled since the original stalking-horse bid for US$475 million. I believe that the other two bidders must have played a key role in pushing up the sales price. However, Nortel’s spokespeople reiterated something they had stated earlier when the stalking-horse bid was announced – namely, that the interests of customers, channel partners and employees represented primary concerns in the negotiations. Therefore, other aspects of the transaction (in addition to the acquisition price) must have given Avaya a superior position in the negotiations vis-à-vis the other bidders. For example, Avaya’s commitment to preserve at least 75% of Nortel Enterprise Solutions’ workforce at the time the deal closes certainly demonstrates good citizenship on both Avaya and Nortel’s parts. 

Nortel is most likely to continue gradually restructuring its business until the deal closes and to also invest in conveying a consistent and compelling message to all stakeholders about the benefits of the merger in order to ensure the most successful final outcome. Joel Hackney mentioned that the next 60 days will be critical for them to prepare the market for the upcoming transition. While Avaya and Nortel will continue operating as separate entities, each will work towards this goal to the best of their abilities. 

For everyone’s sake, I hope that the higher transaction price indicates an even greater commitment on Avaya’s part to make the merger as successful as possible. I hope it takes this opportunity to invest in focused transformation and portfolio evolution and creates a strong entity that can compete more effectively against Cisco and Microsoft (as well as the rest of the communication vendors, of course). There have been speculations that Avaya is likely to just leverage Nortel’s installed base to convert it to Avaya solutions with a minimal investment in preserving and further developing Nortel’s technologies or partnerships. That would indicate complacency that Avaya cannot afford in this period of rapid technology evolution and drastic paradigm shift. I believe Avaya’s leadership has identified the need for change (judging by other initiatives taking place at the company) and is not likely to squander its good fortune granted by the acquisition. 

As the merger provides Avaya with an uncontested leadership position both in terms of installed base and shipment and revenue market share, Avaya should use the “break” from the breath-taking competition with Cisco over the past few years to aggressively transform its product line, overall approach and marketing message. With the new threat posed by Microsoft, incremental changes are no longer sufficient to ensure a telephony vendor’s longevity. Some tough decisions may need to be made, but they need to be made rapidly, yet prudently, and with a vision for Avaya’s role in the communications marketplace not two or five but ten years from now. 

As I stated earlier and as I can see my fellow analysts have commented, the merger definitely represents a positive development for Avaya. This was probably one of few and, most likely, the best opportunity for it to rapidly gain market share. Without more visibility on who the other bidders were and what they had to offer, it is difficult to judge if this was the best alternative for Nortel, but the increased transaction value and the highly positive comments by Nortel’s spokespeople, give us reasons to believe that Nortel secured the best deal possible given the circumstances. 

From a channel perspective, partners may have some mixed feelings. In my opinion, channel partners should not fear that they would be abandoned empty-handed. Avaya has officially committed to a more channel-centric approach and, who else can best install and support Nortel solutions, but its partners? For some time to come, Nortel’s existing customers and those that continue to trust and invest in its technologies will represent a cash cow for Avaya and it will need trained individuals to help milk that cow. Eventually, nothing can prevent partners from also adding Cisco, Microsoft or any other vendor to their portfolio and thus diversifying their portfolio and reducing risk. As vendors struggle for market share, they are more likely than not to seek to attract and nurture new partners. 

From a customer point of view, the most positive development is the end of the uncertainty – in its present magnitude, at least, as some uncertainty will linger on for some time to come until Avaya sends a clear message about its portfolio evolution plans and demonstrates some commitment to this plan through consistent execution. With the rapid pace of technology advancements, customers looking for cutting-edge communication solutions should be prepared for shorter technology refresh cycles, anyway. Declining technology prices are making such more frequent infrastructure replacements more affordable. On the other hand, as architectures become more open, most vendors are developing products and strategies for more seamlessly and cost-effectively migrating their competitors’ customers to their own solutions, thus expanding the array of options for end users and offering them much greater flexibility. 

In conclusion, I would reiterate that, in my opinion, this is a positive development for the industry. Our eyes are on Avaya to share a vision for the future of the merged entity when the deal closes toward the end of the year.