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Avaya (Finally) Closes Deal for Nortel Assets

After entering into an agreement to purchase the Enterprise Solutions businesses of Nortel Networks, Avaya finally seals the deal.
By Eric Felipe-Barkin - Posted Oct 1, 2009
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On July 20, Nortel Networks entered into what's known as a "stalking horse" sale agreement with Avaya worth $475 million, naming the New Jersey–based company in a filing with the U.S. Bankruptcy Court for the District of Delaware and the Superior Court of Justice in Ontario, Canada, as the preferred buyer of its global Enterprise Solutions business, shares of Nortel Government Solutions, and DiamondWare. Just two months later, by the time the dust had settled, Avaya found itself paying almost double that amount, approximately $900 million in cash, plus an additional $15 million for an employee-retention program.

A Frost & Sullivan study, cited by the Wall Street Journal, indicates that the acquisition increases Avaya's share of the market for enterprise-phone equipment in North America from about 17 percent or 18 percent to 27 percent -- Avaya the new leader in the space, leapfrogging Cisco Systems, which has about 21 percent of the market.

As required by law, Nortel had filed a motion after the July bid, seeking the establishment of bidding procedures for an auction to allow other qualified bidders to submit higher or otherwise better offers. The motion created an opportunity for further bids for the assets before U.S. and Canadian courts exercised their final say in approving the transaction.

Ryan Hill, a Nortel spokesman, said at the time of the stalking-horse bid that the company hoped to close the sale by the end of the calendar year. He also acknowledged that the process involved further steps and declined to provide a specific time frame, but the likelihood that other bidders might emerge to seriously challenge Avaya remained unknown.

I think [Nortel's bankruptcy] has been out there long enough that all interested parties have come to the table, including some that were never named," suggested Elizabeth Herrell, vice president for Forrester Research, at the time of the July bid. "This stalking-horse bid is not so low that it's going to invite a lot of competitors," she added. "I'm not so sure that anyone is going to play that game. 'Bid up the price' seems to be more a strategy [for] when things are good. In a slow economy, companies have to be careful about their investments and determine whether they'll benefit their existing business and their existing benefit plans."

As it turned out, however, Nortel did have at least one other suitor: Siemens Enterprise Communications, which, according to Canadian reports, dangled the possibility of situating the headquarters for its merged operations in Toronto, a move that incentivized the Ontario government to pledge $75 million in support of Siemens's bid.

In a report from global consultancy Ovum following the original bid, analysts Daniel Hong and Ian Jacobs wrote that a Nortel acquisition could be a mixed bag for Avaya. Nortel's customers, despite having been rated as some of the most loyal in the industry, were shaken in the wake of company's bankruptcy, allowing competitors (including Avaya itself) to siphon some away. Any poaching that took place, however, apparently had little effect on Avaya's desire to pursue a full buyout.

"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," said Kevin Kennedy, Avaya's president and chief executive officer, in a statement released following the July bid. "This is a strategic opportunity to acquire talent and complementary assets that position the combined company for growth and success."

In a statement released after this month's regulatory approval of the $915 million bid, Kennedy added that "the acquisition brings inherent value to both organizations' customers, employees, and partners, and we look forward to its successful conclusion."

Nortel representatives also characterized the final deal as a winning outcome -- not surprisingly, considering Avaya's final offer was essentially double its original bid. "This is fantastic news for our customers, as this…provides the capability to chart our future with laser-focus, enabling customers to compete in new ways with greater scale and resources," Nortel Enterprise Solutions President Joel Hackney said, in a statement.

Not everyone is convinced that Avaya will have an easy time winning over Nortel's holdout customers -- customers who remained tied to Nortel through an unmistakably dark period. Still, those customers may find appealing the lure of a solid company picking up Nortel's business.

"This could give Nortel customers some stability and some belief that Avaya would probably provide them with a smooth migration path or even support their legacy equipment," Herrell said at the time of the original stalking-horse bid.

As of September 30, however, the possibility emerged for yet another chapter in this ongoing saga: Reports in the Canadian press indicate that the deal will be "reviewed under the Investment Canada Act criteria that measure whether the purchase by a foreign bidder provides a 'net benefit' to Canada."

Additional reporting by Joshua Weinberger.

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