Avaya Is Set to Go Private

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Telecom giant Avaya announced June 4 that it is getting  scooped up by private equity firms Silver Lake Partners and  TPG Capital for about $8.2 billion. The transaction, expected  to be completed in the fall, is subject to shareholder and  regulatory approval. Avaya’s board of directors has already  approved the deal and recommended that the company’s  shareholders move to adopt the agreement as well.

The agreement still allows Avaya to continue soliciting proposals from other interested parties. It had been rumored that two of Avaya’s leading competitors, Cisco Systems and Nortel Networks, were interested in acquiring the enterprise telephony provider that was spun off from Lucent in 2000.

Silver Lake Partners and TPG Capital are no strangers to the technology market. Japan Telecom, ON Semiconductor, SunGard Data Systems, and the pending acquisition of Alltel are a handful of TPG Capital’s significant telecom and technology investments. Silver Lake’s portfolio currently includes outfits like Gartner, NASDAQ, SunGard (owned jointly with TPG), and Thomson.

While the move brings much-needed financial support to Avaya, which has seen its sales flatten and its competition increase, it lacks a technology vision and could undermine the confidence of its customers, many analysts fear.

Sheila McGee-Smith, president and principal analyst of McGee-Smith Analytics, says she is disappointed that Avaya found a financial buyer as opposed to a strategic one. “The nature of the telephony software market is changing,” she says. “We expect over the next few years to see a different category of acquisitions happen, similar to the acquisition of Telephony@Work by Oracle or the acquisition of Tellme Networks by Microsoft. These are more industry-changing events. Clearly Avaya is much bigger [than those acquired companies] but over time [those kinds of deals are] going to be the direction of change.”

She adds, though, “by not being acquired by Nortel, Avaya can remain as a strong alternative to Cisco.”

David Molony, principal analyst at Ovum, says that the deal is a vote of confidence in Avaya and the IP telephony business because private equity typically is looking for businesses with reliable cash flows it thinks can be improved quickly and substantially. “Until now, telecom equipment vendors had been left to sort out their own financial futures,” he said in a written statement. “Avaya is different in that it is not encumbered by the need to fund infrastructure businesses. Nonetheless, it may still have missed out on the drive to consolidation and partnership.”

Molony adds that Nortel and Cisco, arguably Avaya’s two main rivals in IP telephony and unified communications (UC) systems, have both agreed to develop new services on the back of Microsoft’s Office Communications Server. “Avaya may have had a chance to join them, but apparently chose not to. Instead it has its own expanded UC project in development,” he said. “Whether that can be brought to market independently is really a question now for the new owners to consider.”

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