10 Comments

Summary:

[qi:gigaom_icon_voip] The piece-by-piece sale of fallen Canadian giant Nortel continues. Avaya, an enterprise telephony company that was carved out of telephony’s fallen star, Lucent Technologies, has bought Nortel’s PBX business for $900 million in cash, the two companies announced today. Initially Avaya had bid $475 million […]

[qi:gigaom_icon_voip] The piece-by-piece sale of fallen Canadian giant Nortel continues. Avaya, an enterprise telephony company that was carved out of telephony’s fallen star, Lucent Technologies, has bought Nortel’s PBX business for $900 million in cash, the two companies announced today. Initially Avaya had bid $475 million for the business, but raised its offer. Avaya is going to spend another $15 million for an employee retention program. Verizon recently filed a motion to block this deal on the grounds that it doesn’t take into account the current installed base of Nortel equipment. What do you think? Did Avaya get a good deal or did they overpay for a legacy business that is slowly shrinking and losing ground to Cisco and upstarts who are offering open-source PBX options?

  1. Avaya(TPG/SL) bought Nortel for the channel expansion and marketshare growth. They will look to churn the Nortel base into buying Avaya solutions.

    As economy recovers and large enterprise starts buying capital equipment again it’s very feasible that Avaya could easily gross an extra $900M in the course of 12 to 18 months as a result of the acquisition of the Nortel base and Nortel VAR channel partners. This is what smart private equity buyers do. The attempts by Gores Group (Seimens Enterprise Telecom Division owners) to acquire Nortel mean they saw the exact same value prop as TPG/SL.

    The $15M set aside as a “retention” fund for Nortel employees likely is really more a “severance” fund. This is a “spoonful of sugar” to be used in softening the blow for Non-US workers who all have severance requirements built into employment contracts via unions and/or non-US govt regs. US-based Nortel workers are going to have a very rough go of it. It’s mostly a non-impact for Avaya workers or a slight positive.

    Also in a more strategic sense this suddenly makes Avaya a lot more attractive in relation to a future liquidity event for TPG/SL. Whether they decide to IPO and relaunch Avaya as a public company or sell it, it’s now a more attractive property. Selling it now may be somewhat more complicated because if it was sold to Cisco or another major telecom player now you truly would have a non-competitive market situation from US FTC/DOJ perspective. So the ideal private sale for TPG/SL would be to Microsoft. That would give at least a duopoly of Cisco versus Microsoft in the Enterprise Telecom market. Another possibility would be a sale to a major telecom carrrier like Verizon; notice VZ complained to DOJ about Nortel/Avaya merger.

    In a much broader scope, the Enterprise Telecom/UC market is being set up for a disruption by solutions like Google Voice/Wave. Eventually the future version of traditional “Hosted Telecom” that the RBOC carriers deliver(ed) is going to be replaced by something I call “Cloud Telecom”; or more appropriately “Cloud Collaboration”. F500 companies are going away form big corporate campuses with thousands of people at one site toward a very distributed employee model. Employees more and more are scattered around in small offices domestically and overseas and also lots of people working from home/virtually. So big iron CPE boxes at corporate sites become less and less relevant. Instead all that is needed is for an employee to be able to reach those corporate resources at a network connected datacenter via SSL VPN over broadband. So why not then just outsource the datacenter instead of using inhouse datacenter and IT?

    That is where an offer like Google Voice, enhanced with perhaps an Avaya CMS call center supporting virtual agents, becomes very attractive on a variable cost (subscription) basis.

    This will disrupt both traditional hosted voice AND customer premise telecom businesses as they currently exist. Even very large multisite companies will be able to go fully to Cloud Collaboration, even in the call center. In call center the traditional equipment will hang on for a long time but now in a hosted/subscription model versus as a capital purchase for the enterprise.

    However, It’s going to take about 5 years to 7 years for this disruption to happen and before it becomes clear this is coming, TPG/SL will sell Avaya or relaunch Avaya as a public company and get their money back.

    Share
  2. Excellent point about companies becoming more virtualized and geographically distributed–many companies are taking this approach for a multitude of reasons, including DR, talent acquisition, cost of living/doing business, and on and on. With Skype and Avaya now sharing ownership, I think you’re right on a play with something like a Google Voice (or more than likely Skype) combined with a virtual call center. Of course, it doesn’t have to be Avaya, and it certainly won’t be 5-7 years off–such products are already in play and let you work with any device you want to better collaborate with your customers, including existing Avaya and Nortel equipment: http://www.on-state.com.

    Share
    1. Hi Shawn,

      I agree with your point about Skype technology having a play in this with offers like Google Wave/Voice.

      Another set of players that I think are very well positioned to make some good decisions in this market evolution are the Cable MSO’s with their voice offers bundled with broadband and TV/video. They have been wildly successful in taking share from the RBOC’s in residential voice and now they are moving aggressively on top of that success into SMB bundles that include business voice.

      So I definitely agree that it may or may not be Avaya that makes the right moves over the next 3 years.

      Regarding the next 5 to 7 years the reason I used that number is that is the timeframe I think the actual incumbent players disruptions will actually reach critical mass. Certainly ALL the technology exists today to implement the kind of distributed/hosted solutions that are going to dominate in the future. But the market disruption itself won’t likely happen until 5 to 7 years mainly as that number represents the length of the average capital equipment depreciation schedule for major telecom CPE purchases for a large enterprise.

      The timing of Market disruptions are actually always about business timing and market demand for a disruptive technology versus the actual availability of the disruptive technology. When any particular technology actually ends up disrupting a market it is usually not in fact a “new” technology.

      Example: Think of HTML. It was invented in labs in the 60s./70s. Saw first light of day commercially in early 90s. But it took until this past year (15 years) for it to actually start significantly disrupting newsprint incumbents as a news communication medium.

      If Cloud Telecom disrupts CPE telecom within 7 years it will actually be a very quick disruption.

      Share
  3. If another major IT company decided they wanted to play in the IP telephony space, theres nothing like spending $15bn in buying the #1 spot, depending of course on Avaya managing to merge the Nortel Business Units ruthlessly, and keeping the current customer base happy.

    The Question is which IT company has $15bn to spend to jump to #1 in VoIP, from being nowhere? Who has the most to gain by beating Cisco?

    This sort of relates to what I saw Om write a few months ago. If Cisco bought Dell, then they would suddenly become one of the largest IT Companys in the world.

    I am going to be bold. In five years, we are going to have three super IT Companys who do everything you need. If you think we have vendor lockin now, then just wait till then.

    Industry Standards have never been more important.

    Share
  4. [...] carrier Ethernet assets of Nortel’s Metro Ethernet Networks (MEN) business. Nortel which has been selling off its various divisions first announced its decision to sell its optical business last September. It is still unclear how [...]

    Share
  5. [...] with Cisco, IBM and Siemen’s communications following closely. It was interesting to see that Avaya is only a strong contender and it is noteworthy to inform everyone that Avaya completed its acquisition of Nortel recently (the [...]

    Share
  6. [...] got the go ahead from Canada to buy Nortel’s PBX business for $900 million in [...]

    Share
  7. [...] Dec. 18: Nortel completes the sale of its global Enterprise Solutions business, as well as its government equipment business and DiamondWare subsidiary, to Avaya for $900 million. [...]

    Share
  8. for my personal opinion its was a stupid idia Avaya buy Nortel Networks, we been with Nortel since long time ago and everything was good until today and still good, i dont know but i love Nortel, guys if you all can have the United States of America vote wish one they want, im very and strongly sure that everybody wants NORTEL NETWORKS. and why A V A Y A wants to discontinue the Norstar phone system on October 4, 2010, shit its impossible, we hate that, come on guys let Nortel do their job, we are not going to change our Nortel Meridian phones and Systems for nothing no matter how good is the technology, so come on, its ok if Avaya and Nortel Networks can work together as a team please guys we begging you all, PLEASE DO NOT DISCONTINUE NORTEL EQUIPMENTS AND PLEASE KEEP NORTEL WORKING LIKE BEFORE, there is a lot of people in whole United States still with Nortel Networks, and their need Nortel Services, come on dont due in USA, have a heart guys. thank you for your concideration.

    Share

Comments have been disabled for this post