On Monday it was announced that Avaya had won the auction to acquire Nortel Enterprise Solutions for $900M plus another $15M for an employee retention program. Nortel, a behemoth Toronto-based telecom, was once seen as a motivating force for business VoIP PBX development. This year it has instead been hemorrhaging money, filing for bankruptcy, liquidating assets, and dropping enterprise customers. While Avaya’s deal blocks rival-bidder Seimens and gives them a leading large enterprise market share in North America over Cisco, the move has many analysts shaking their heads.
Nortel’s Nosedive
Nortel filed for bankruptcy protection at the beginning of 2009, but many analysts were skeptical of Nortel’s survival. The bankruptcy proceedings combined with poor economic conditions and later the auctioning of assets, including Nortel’s wireless assets to Ericsson for $1.13B, to drastically damage customer confidence in the enterprise space. The emergence and rapid adoption of hosted VoIP phone systems has also drawn the vast small enterprise crowd away from Nortel’s business solutions. These factors culminated in a staggering year-over-year revenue decline for Nortel’s Enterprise Solutions Division of 28% in Q2 2009.
In his previous position at the helm of Motorola, now ex- CEO of Nortel Mike Zafirovski had helped increase market share and bring the company back to being profitable. In August of this year, Zafirovski stepped down after being unsuccessful in doing the same for Nortel.
Avaya’s Troublesome Gambit
On the face of the deal, it’s hard to see what Avaya hopes to gain. In the short term, they’ve padded their customer list with Nortel’s admittedly hefty enterprise market share, fending off Seimens and jumping ahead of Cisco in that regard. In the long term, they’ve boarded a sinking ship and need to find a way to keep those same customers from continuing to leave – especially if they’re skeptical about the change of ownership. Avaya’s past troubles with acquiring and retaining enterprise clients may be a crippling factor moving forward.
Then there’s Verizon. The communications giant has continually had its hat in the ring on this deal, contending that Avaya won’t honor Verizon support contracts it had with Nortel. Verizon’s contention goes beyond simply being upset about losing business, citing in a court filing that if Avaya doesn’t honor the contracts, “communications networks critical to the operation of the federal government, and the defense, health, and security of the American public are at risk.”
Last but not least is the U.S. Department of Justice, the anti- anti-competitive sledgehammer that has a keen eye on whether or not this move sufficiently decreases the competition level within the enterprise business phone system arena. With Cisco around, there might not be much for the DOJ to worry about – unless you dig a little deeper. Avaya is backed by large-scale investment firm Silver Lake, the same company that led a deal a couple weeks back to buy 65% of Skype from eBay. Separately these deals might be fine, but the DOJ might be concerned that these acquisitions together, within a short time frame, speak to an underlying anti-competitive move.
Time will tell what this deal spells for all players involved. There’s sure to be a lot more fireworks before the dust settles on this deal. What are your thoughts on the acquisition? What do you think it means for Nortel’s customers and partners, and the future of business VoIP services?
It does sound quite risky, so only time will allow us to see if this was the correct move for Avaya.
-Jack