Moderated by: Jason Alley
On Monday 9/14, Avaya announced it was selected to acquire Nortel Enterprise Solutions for $900 million and an additional $15 million associated with a Nortel employee retention program. The question is what will Avaya really get out of this deal? And, is it worth what they paid for it?
There have been several write-ups covering the 9/14 announcement. Here are a few I ran across:
During the .com boom we saw some pretty creative investing, marketing and positioning to enhance one’s valuation. We also saw an extreme focus on short term financial gain, sometimes at the expense of a company’s long term health and viability. Could this transaction be similar?
In a recent No Jitter posting, Allan Sulkin reveals an important financial motivator that may be surrounding the deal and discusses an interesting dilemma Avaya and its investors face:
“The primary business objective of Avaya is to remain a competitive supplier of enterprise communications products and services tomorrrow and for generations to come; the primary business objective of private equity firms (such as Silver Lake/TPG Capital) is to generate targeted returns on investment, the sooner the better. The two objectives do occasionally intersect, but are not identical. This must be taken into account anytime there are large sums of money at stake. Improved market dynamics resulting from a merger of Avaya and Nortel ES operations are important, but financial results for the stakeholders are usually more important.”
Is acquiring Nortel Enterprise Solutions going to help Avaya remain a competitive supplier? I certainly wouldn’t bet too much on it. Rather, it may prove to be a distraction in that regard. As mentioned in a previous posting, I haven’t seen many large enterprises making a significant investment in Nortel contact center or enterprise telephony solutions for some time. Knowing this, many Nortel channels have likely been diversifying their portfolio to protect their financial viability. Thus, while there has been a decent amount of discussion around it, I wouldn’t place too much value on the channel play Nortel brings Avaya (at least in the U.S.).
Will acquiring Nortel Enterprise Solutions help Silver Lake/TPG enhance the perception of Avaya’s (current and future) value in the marketplace? Perhaps. The combined market share, installed base, and service revenues will be impressive, but I don’t think it will address competitive concerns companies such as Cisco and Microsoft bring. My advice to potential investors would be to pay close attention to revenue and income growth trends for the combined entity - specifically from system sales versus services. How many existing Nortel customers choose to stay with Avaya versus shifting to a competitive solution provider when their systems require a major upgrade or replacement is an important factor when considering the future value of the deal. It is my experience that customers of acquired companies don’t always show a strong sense of loyalty to the acquiring companies, especially when there is significant overlap in portfolios. Thus, Avaya is likely going to have to fight hard to win each Nortel customer over when their system requires a significant upgrade and/or replacement. It will be interesting to see how successful they are in doing so.
All said, perhaps the $900M price tag is a good enough deal that it doesn’t really matter if it positions Avaya to remain a competitive supplier or dramatically enhances the perception of their value in the marketplace. Perhaps the services revenue and incremental pull-through from re-asserting themselves as the market leader is worth the price tag alone. While I haven’t run detailed financial models to be convinced, I’m sure the Silver Lake/TPG Capital team has thought this through very carefully and is making a sound financial move. Nonetheless, I’m not sure it’s worth the the distraction it will bring to an Avaya team that is already busy fighting a very bloody battle and has new enemies looming around the corner.
What are your thoughts, reactions?
