Avaya proposes to acquire Nortel – Kissing cousins could be merged by the end of the year

What has happened?

Avaya has announced today, July 20, 2009, their desire to acquire Nortel’s Enterprise Business Unit  and the shares of Nortel Government Solutions and DiamondWare, Ltd, bidding $475M for the businesses.  Avaya has offered to assume $28M in debt associated with Nortel Government Solutions as part of the transaction.   This kicks off a set of processes that will lead to a new owner for Nortel – and it may be Avaya or some other bidder.

Why are Nortel and Avaya interested in joining forces?

This proposed transaction will help Nortel to get out from under the financial issues that brought the company to file for creditor protection on January 14 of this year, through an acquisition with the backing of private equity holders including Silver Lake Partners.  It allows existing Nortel customers to see a timeline and track a set of milestones to the completion of the process.  Both Avaya and Nortel would benefit from the increased scope and scale of operations and products – a combined entity would be a leading player in the markets in which both companies participate, including voice switching, unified communications, messaging, audio conferencing, and contact center. Avaya is confident of their ability to continue to reinvent and invest in the ongoing business at the same time that the integration of Nortel and Avaya is accomplished – should their bid be approved. 

Will this deal get done?

The question is this “Will the creditors, courts, and regulators approve the acquisition?”  MatlinPatterson, who holds approximately 10% of Nortel’s corporate debt, has expressed reservations about the sale of the wireless networking business to Nokia-Siemens (MaitlinPatterson still has a week to submit a competing bid in the auction of that wireless networking business  - and could extend that bid to cover network solutions as well), raising the specter of holding Nortel together for a period of time in order to maximize the return to Nortel’s bond holders.  Other bidders can be anticipated in the process, Nortel’s role in the Enterprise Communications market is important and $475Mn is not so high as to discourage other bidders.  Regulators will surely want to scrutinize – and potentially alter – the terms of the deal as well. 

Kissing cousins may just tie the knot – but it will take time

Much like the combination of AT&T and BellSouth reunited parts of the old Bell Systems broken apart by government regulators in 1984, this deal brings together even older parts of the Bell System, namely parts of Bell Labs, Western Electric, and Northern Electric of Canada that were separated in 1956.  Putting these entities together would be hard work requiring combining corporate functions as disparate as legal and HR, reinventing a joint innovation process, rationalizing products roadmaps, optimizing support and services processes, and defining branding for the entity. 

None of this detailed work can be begun until the legal and financial processes are complete, and that will likely not be done until fourth quarter – quite possible late 4th quarter – of this year.  Why so long? Avaya’s bid has been approved as a stalking horse bid by creditors, now the courts need a week to 10 days to study and approve the bid.  Then an approximately 60 day 363 (or stalking horse auction) process will take place allowing competing bids to be submitted for evaluation.  At the conclusion of the stalking horse period, and only at that point, will the winning bidder be known.  Once the courts, creditors and regulators (and Nortel if there are competing bids) have dotted their i’s and crossed their t’s, then the deal will move to closure. Regulators around the world – the US SEC, and the EU Competition Authority for example - will likely review the transaction in detail, potentially adding more time to the process.

In the end both firms seem happy with the proposed combination

Nortel has committed to achieve a fair return for creditors while finding a home for Nortel’s people, technology and products.  Joel Hackney, President Enterprise Solutions at Nortel believes that a combination with Avaya is an excellent vehicle to do just that.  Kevin Kennedy, CEO of Avaya, believes that the combination will help to accelerate the transformation of Avaya’s channels, and improve the innovation processes that R&D can use to bring new technologies and capabilities to market.  Once the financial hurdles are cleared, the task of making clear how these strategic objectives will be achieved can begin in earnest.

What should existing Nortel and Avaya customers do?

Take note of the schedule and track the progress particularly during the stalking horse period. If an alternative bidder emerges it will likely be during that approximately 60 day period.  Nortel customers should be more confident about their future as Avaya is one potential buyer who understands their needs and will devise processes to deliver new technology and/or support existing technology to deliver superior quality of service.  Management of a merged entity would seek to minimize customer impact – especially since they still have a huge vested interest in ensuring that the customers do not defect to other UC&C vendors.  Existing customers of both firms should probably wait before making large-scale investment or alterations to Nortel and Avaya infrastructures to avoid undertaking a potential second re-architecture when the deal is completed, but incremental improvements and capacity additions can be undertaken as originally planned with minimal risk.

What do I think?

I think the proposed combination has the potential to create a competitor with the scope and scale to compete in the Unified Communications market around the world through both direct and indirect channels if the current proposal is executed.  The new firm will be challenged to establish, maintain, and grow their brand presence and awareness in the market.

 What do you think?  Let us know.

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