With Nortel Deal, Avaya Moves Past Cisco in Enterprise Telephony

Avaya is propelling itself to the top of the enterprise telephony market with its $900 million purchase of bankrupt Nortel Networks' enterprise business.

The combination of Avaya and Nortel's enterprise business will give Avaya about 25 percent of the enterprise telephony market, outdistancing Cisco Systems, which now holds a 16 percent share, according to the companies and analysts.

Avaya and Nortel announced the deal Sept. 14, saying Avaya had won the bidding for the Nortel Enterprise Solutions business, which generated $2.4 billion in revenue in 2008. The business includes Nortel's UC (unified communications) technologies.

The deal also includes Avaya spending another $15 million for employee retention costs. Avaya also will get part of Nortel's Government Solutions and DiamondWare businesses.

Avaya, which makes phone systems for businesses, in July entered a "stalking horse" bid of $475 million for the Nortel unit, essentially setting the floor for bidding on the business. Avaya outbid Siemens Enterprise Communications for the Nortel unit.

Zeus Kerravala, an analyst with Yankee Group, said bringing Nortel's Enterprise Solutions businesses into the fold will help Avaya build its customer base.

"Avaya, challenged in the past with new customer acquisition, now has a big base to sell into," Kerravala said in an e-mail. "And Cisco, after battling Avaya for years for enterprise telephony leadership, now finds itself No. 2 with 16 percent in market share, and facing a significantly more challenging competitor with the combined Avaya-Nortel."

The deal still has a few more hurdles to clear. It still needs to be approved by bankruptcy courts in the United States and Canada.

Another challenge could come from Verizon Communications officials, who said before the auction began that if Avaya won the business, it could have national security ramifications. Avaya officials have said they don't think the dispute with Verizon will stop the deal.

Nortel filed for bankruptcy protection earlier in 2009 after officials said the company lost almost $6 billion in 2008, thanks in large part to the state of the economy. In the spring, Nortel decided that rather than try to restructure the business the better course for customers and employees would be to sell off pieces of the company.

Nokia Siemens Network is looking to buy Nortel's CDMA (Code Division Multiple Access) wireless business and LTE (Long Term Evolution) technology for $650 million, and Nortel also has agreed to sell wireless technology business to Telefon AB L.M. Ericsson for $1.13 billion.

Joel Hackney, president of Nortel's Enterprise Solutions business, said the deal with Avaya will give customers confidence in the future of the products they're using.

"As we work through integration planning, it is business as usual, and we will continue to focus on supporting our installed base," Hackney said in a statement.