Avaya Ready to Buy Nortel for $475M. Visions, Challenges Ahead

Nortel was once among the most powerful Telecom euipment manufacturer. This Canada-based company once had a stock quote of $240/share. Industry had worst for Nortel, It went down to as low as few cents recently. After struggling for years and Filing Bankruptcy under chapter 11, Nortel was desperately looking for a total Overhaul and an Interested Investor. Today, the leaders finally found a breath of relief. Nortel finally finds a hope. Nortel has entered into a “stalking horse” asset and share sale agreement with Avaya for its Enterprise Solutions business.

After almost a month of ongoing discussions, the proposed amount has been set to $475 million by Nortel. As per the agreement : It includes the planned sale of substantially all of the assets of the Enterprise Solutions business globally as well as the shares of Nortel Government Solutions and DiamondWare, a maker of softphones.

On this Eve, Nortel CEO Mike Zafirovski said:

“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. We have determined that the sale of our businesses maximizes value while preserving innovation platforms, customer relationships and jobs to the greatest extent possible. The CDMA and LTE Access stalking horse asset sale agreement announced on June 19th, and today’s agreements around our Enterprise business are solid proof of that value. This represents the best path forward, and we are advancing in our discussions with interested parties for our other businesses.”

“The many customers I have spoken with have been highly supportive of our efforts and transparency throughout this process. They value our employees and technology platforms and are appreciative of our service levels which are at multi-year highs.

“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.”

Avaya president and CEO Kevin Kennedy added to it, stating that the deal will benefit Avaya on several fronts.

“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,” 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. We are committed to protecting the communications investments of the customers of Avaya and Nortel, and to effectively executing the integration of Nortel Enterprise Solutions and Avaya.”
One industry analyst sees the deal benefiting all parties involved.
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“This puts Avaya ahead of Cisco for enterprise voice sales and enters them into the networking business,” says Henry Dewing, an analyst at Forrester Research. “There are advantages for Avaya and Nortel — achieving scope and scale to lead the worldwide communications market. There are opportunities for buyers to have a global vendor offering hardware, software, and services to advance their communications and collaboration capabilities. Both firms recognize the need to serve mixed vendor environments and leverage many channel options and partners for delivery.”

Avaya had 16.6% of the $16 billion enterprise telephony market in 2008 to runner up Cisco’s 14%, according to Dell’Oro Group. Nortel came in 4th, with 9.6%, trailing Siemens at 11.4%. Together, It gives more market share to Avaya.

Challenges for Avaya: Merits and De-Merits of Merger

Thouth Avaya will attain a larger customer base, and wider product ranges, challenges would remain with product overlap. As a matter of fact, Cisco, Alcatel-Lucent and Siemens, Huawei could benefit as Avaya works through the redundancies.

On the Positive side, Nortel’s LAN switching portfolio gives Avaya an entry into that market and could end its joint marketing relationship with Extreme, Kidron states.

But first, Avaya has to win the bidding.

“We see a strong possibility for an additional bidder(s) for Nortel’s enterprise assets emerging, especially given the low price,” Kidron states in his bulletin. “Siemens or private equity firms such as MatlinPatterson (a major bondholder) could participate in the bid. Both have either shown interest in the past or would make a good fit. Overall, this is another milestone in Nortel’s ultimate asset-unwinding process.”

MatlinPatterson is preparing a bid for Nortel’s CDMA and LTE wireless assets, which Nokia Siemens has already offered $650 million for in another stalking horse arrangement.

The International Nortel Networks Users Association (INNUA), which represents more than 4,000 Nortel enterprise customers worldwide, issued a statement saying that it “believes the acquisition will allow the company to refocus its energy and resources on its solutions, and quiet concerns about the corporate structure that has beleaguered the company.”
“This chapter in Nortel’s history is closed,” said INNUA Executive Director Victor Bohnert in the statement. “We understand that there is still much that can change during the auction process. However, we will begin working with Avaya as soon as it’s appropriate to determine how we can best represent the collective voice of their new customers.”

Under the stalking horse arrangement, Nortel will file the asset and share sale agreement with the U.S. Bankruptcy Court for the District of Delaware along with a motion seeking the establishment of bidding procedures for an auction that allows other qualified bidders to submit higher or otherwise better offers. Following completion of the bidding process, final approval of the U.S. and Canadian courts will be required.

As previously announced, Nortel does not expect that the company’s common shareholders or the preferred shareholders will receive any value from the creditor protection proceedings and expects that the proceedings will result in the cancellation of these equity interests. Nortel was delisted from the Toronto Stock Exchange on June 26.

So It’s all upto the Industry’s top telecom-equipment leaders. Who would bid the highest and swipe away the Avaya’s hopes.

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