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VoiceCon eNews—How Big Will Avaya Go?
I’m writing this newsletter just after Avaya announced it will pay $475 million to acquire Nortel Enterprise Solutions out of bankruptcy, as a “stalking horse” buyer—which means that they could be outbid in a court-supervised auction, though Avaya is certainly the odds-on favorite.

You can follow continuous updates and analysis at No Jitter (http://www.nojitter.com), but there’s another couple of No Jitter posts, not directly related to Nortel, that I want to call your attention to. These have to do with purported interest on the part of Silver Lake partners, the private equity firm that owns Avaya, in potentially acquiring Tandberg, the video solutions company (see Krapf; and Sulkin). We could be looking at an Avaya that fully intends to go toe-to-toe with Cisco, Microsoft and IBM, and fully plans to be part of a Big Four in North American enterprise communications.

Another sign that Nortel could just be an appetizer for Avaya: They’ve hired a key M&A expert away from IBM . The publication reporting this story quotes Mohamad Ali, Avaya’s new M&A honcho, as saying the move is “an opportunity to participate in and shape a whole new era of intelligent communications for healthcare, financial services, government and other industries…. This represents a unique opportunity to potentially participate in one of the largest IPOs in the coming years.”

To me, that comment also suggests that Silver Lake and its co-owner of Avaya, TPG, believe they can’t earn back their $8 billion initial investment in Avaya just by taking the company public at more or less the scale they bought it in 2007—not surprising, given that the market ain’t what it was back then. They need to try to build Avaya into a much more substantial, broad-reaching communications powerhouse.

One open question is what Avaya should do about Nortel’s data networking portfolio. If they’re going head-to-head with Cisco, that would suggest they should keep it and try to make these products a serious contender. But maybe the smarter move would be to sell off this business unit to help recoup some of the Nortel purchase price, and emphasize Avaya’s strategic partnership with HP, whose ProCurve line of products has gained traction as a lower-cost alternative to Cisco. This would also be one fewer organizational issue to deal with in the merger; unless the new, expanded Avaya is really going to put significant weight behind the Nortel data line, that product family could find itself neglected and further fading away.

Besides, is the data element so critical? Neither Microsoft nor IBM are coming to the Unified Communications market with data gear. Avaya’s gone the data route in the past with the Cajun switch products, and might be wiser to avoid treading that path again.

And what about Cisco? Does the Avaya-Nortel deal change what Cisco should be doing? I don’t think it will. To get where it is today in enterprise communications, Cisco’s strategy consisted primarily of leveraging its existing position in enterprise IT, and there’s no evidence that this strategy is flagging. In fact, Cisco is gaining market share in contact centers, where they had not been as strong–suggesting that the “can’t get fired for buying Cisco” mentality is not only alive and well, but spreading.

And Microsoft? Well, their joint venture with Nortel, the Innovative Communications Alliance (ICA) probably isn’t long for this world now. More relevant, however, is what happens to Nortel’s customer base in the wake of the Avaya purchase. If Avaya locks down the channel and comes up with a coherent production integration and migration strategy for the Nortel base, Microsoft has much less chance to poach these customers when Release 3 of OCS comes out next year. If, on the other hand, Avaya stumbles, allowing confusion to reign among customers and distributors, Microsoft could have an opening.

One final comment: Over the years, thanks to VoiceCon and No Jitter, we’ve gotten to know tons of great people who work for Nortel Enterprise Solutions. Over the past decade, Nortel’s upper management consistently failed these folks. Now that the die is cast, we wish the best to our Nortel friends.

Posted in Market Trends, Tech Trends |

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