Avaya Bids $475 Million for Nortel Enterprise Business

By Jeffrey Burt  |  Posted 2009-07-20

Avaya Bids $475 Million for Nortel Enterprise Business

Bankrupt communications vendor Nortel Networks is continuing to sell off its businesses-most recently, Avaya put in a bid for its enterprise division-and the fire sale looks like it will continue.

Nortel July 20 announced a $475 million "stalking horse" agreement with Avaya for its Enterprise Solutions Business, which includes such assets as Nortel's UC (unified communications) and government business.

The stalking horse agreement is similar to the one Nortel made with Nokia Siemens Networks, which in June made a $650 million bid for Nortel's CDMA (Code Division Multiple Access) wireless business and LTE (Long Term Evolution) technology.

Like the Nokia Siemens deal, Avaya's bid sets the floor for bidding on Nortel's enterprise unit. If a rival were to place a larger bid for the unit, Avaya would have the option to match or beat the bid.

The move comes as officials with Nortel, which filed for Chapter 11 bankruptcy protection earlier this year, look to raise money through the sale of their businesses. When the company first entered into bankruptcy, officials spoke of creating a restructuring plan. Now the focus is on selling off its businesses, according to President and CEO Mike Zafirovski.

"We continue to be fully focused on running our operations and continuing to serve our customers while actively engaged in the sale of our businesses," Zafirovski said in a statement. "We have determined that the sale of our businesses maximizes value while preserving our innovation platforms, customer relationships and jobs to the greatest extent possible."

It's still unclear what Nortel's endgame will be, Yankee Group analyst Zeus Kerravala said in an interview.

"They may be tearing away enough parts so that what remains can be profitable on its own," Kerravala said. "It's like a yard sale. Once you sell out enough stuff, you can then grow what you keep."

For Nortel, that would most likely be its carrier businesses, which has been a core piece of Nortel's history.

For customers of Nortel's enterprise business, an acquisition by Avaya would be a huge win, Kerravala said.

"For Nortel's customer base, there's been a long period of unprecedented uncertainty," he said. "That time is over."

The deal also would make the top vendor of enterprise communications technology, overtaking Cisco Systems. Kerravala estimates that with Nortel, Avaya would have about 25 percent of the enterprise communications market, with Cisco holding about 16 percent.

"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," Avaya President and CEO Kevin Kennedy said in a statement. "This is a strategic opportunity to acquire talent and complementary assets that position the combined company for growth and success."

Nortel's Enterprise Solutions Businesses garnered $2.4 billion in revenue in 2008. Kerravala said he expects Avaya would do a better job than Nortel generated profits from it.

Court Approval Needed


Avaya officials said the deal needs to go through a competitive bidding process and needs approval from the U.S. Bankruptcy Court in Delaware and the Ontario Superior Court of Justice. They expect the process to take several weeks.

The Bankruptcy Court approved Nortel's deal with Nokia Siemens in early July.

However, challenges to Nortel's plans to sell off its businesses are appearing. MatlinPatterson Global Advisors, a Nortel creditor, reportedly has talked with Nortel officials about buying the entire company, or at least developing a plan to restructure the company rather than selling off its assets. MatlinPatterson reportedly has until July 21 to submit a plan with the Bankruptcy Court.

Either way, though, Yankee Group's Kerravala said there needs to be consolidation in the business communications space. Over the past 20 years, the voice industry has grown from a handful of companies, such as Lucent, Nortel and Siemens, to including Cisco, 3Com, ShoreTel and now-with the advent of voice software-Microsoft, IBM, Citrix and possibly Google, Kerravala said in a July 20 blog post.

"Through these past few transitions we've doubled the number of suppliers of voice services but there isn't double the number of business end users," he wrote. "Couple this with wider adoption of mobile phones and its clear the market needs to rationalize down."

Kerravala also noted that Avaya would have to play the part of diplomat should it acquire Nortel's enterprise business.

"From a product perspective, the combined organization is going to have to go through some consolidation of products on the voice side and decide what to do with data portfolio," he wrote in the blog. "Should it choose to keep the data portfolio, Avaya would now have an end-to-end voice and data solution-a systems approach, similar to what the Avaya leadership had when they worked at Cisco. This will cause some tension between Avaya and some of its alliance partners, such as Brocade, Extreme and [Hewlett-Packard], so the company will need to navigate that carefully."

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