Nortel Looking to Sell Enterprise Business to Avaya

Nortel Networks yesterday entered into a "stalking horse" asset and share sale agreement with Avaya worth $475 million.

Nortel will name Avaya as the preferred buyer of its global Enterprise Solutions business, shares of Nortel Government Solutions, and DiamondWare in a filing with the U.S. Bankruptcy Court for the District of Delaware and the Superior Court of Justice in Ontario, Canada. This agreement does not guarantee that Avaya will end up with the Nortel holdings.

As required by law, Nortel will also file a motion seeking the establishment of bidding procedures for an auction that allows other qualified bidders to submit better offers. Further bids for the assets will then be considered by the U.S. and Canadian courts, which have final say in approving the transaction. 

Nortel hopes to close on Enterprise Solutions by the end of the calendar year, says Ryan Hill, a company spokesman. 

Should Avaya manage to acquire Nortel’s assets at the end of this process, it could emerge with a very robust set of professional services offerings. 

“Nortel has a pretty strong [professional services] team for contact center in place,” writes Daniel Hong, lead analyst for Datamonitor, in an email to Speech Technology. “Especially in the area of speech applications. There should be great complement in those areas.”  

“Avaya is shoring their leadership position if this goes through,” adds Elizabeth Herrell, vice president for Forrester Research.

“[It] would put Avaya in a stronger position to compete, not only against Cisco, but Microsoft, which is emerging as a vendor,” she says. “With the coming of Microsoft in the future and other potential players like Google…you have to look at your strategy and see how you’re going to compete. If you start having low market share, you’re just going to be more subject to consolidation, buyouts, etc.”

For all its potential advantages, there are definite challenges that would also face Avaya after a Nortel Enterprise acquisition.

In a report from global consultancy Ovum, Hong and Datamonitor analyst Ian Jacobs write that a Nortel acquisition could be a mixed bag for Avaya. Nortel’s customers, having been some of the most loyal in the space, have been shaken in the wake of company’s recent bankruptcy, allowing competitors (like Avaya itself) to bleed business away. However, the poaching has apparently not mitigated the need for a buyout.

Convincing Nortel’s holdout customers could prove daunting for its buyer or buyers—especially given that these customers held on through an unmistakably dark period in the company’s history. Avaya would likely have to prove its value to Nortel’s customers one by one. To do this, it would have to smoothly rationalize and integrate the Nortel Enterprise offerings into its own quickly and smoothly.

Aura, Avaya’s session controller that provides a great deal of interoperability across a wide swath of product lines, could aid that process along. Forrester’s Herrell suggests that while full scale rationalization and consolidation will have to take place eventually. Aura could provide a workable intermediary in the meantime.

“If Avaya can keep a fairly high percentage of [Nortel’s] installed base, grow it, and market to it, then the [$475 million] price will seem very reasonable,” Herrell says. “If the installed base continues to defect, then that price is going to seem like they paid too much”—and in a recessionary economy, there’s nary a vendor that can afford to pay too much.

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