Avaya Stalks Nortels Assets

Avaya  has been named as a stalking horse bidder for Nortels North American, Caribbean and Latin America (CALA) and Asia Enterprise Solutions business and an asset sale agreement with Avaya for the Europe, Middle East and Africa (EMEA) portion of its Enterprise Solutions business for a purchase price of US$475 million. The bankruptcy court has to set the auction terms.

The stalking horse process applies to the sale of the assets of a bankrupt company. The stalking horse's bid, in this case Avaya's bid of $475 million, defines the assets that are up for bid sets the initial bid during the auction process. Other suitors will have to exceed the bid to get Nortels assets.  On June 19th, Nortel announced  that a joint venture between Nokia and Siemens AG, Nokia Seimens Networks, was named the stalking horse bidder for Nortels CDMA and LTE  Access business units at $650 million. Once the bankruptcy court sets the rules for the auction, rival companies can bid for Nortel's assets.  The auction process can take anywhere from 45 to 60 days to complete, so we should know  the results in the mid-September to mid-October time frame.

Nortel President and CEO Mike Zafirovski said in a statement today "We continue to be fully focused on running our operations and continuing to serve our customers while actively engaged in the sale of our businesses. We have determined that the sale of our businesses maximizes value while preserving innovation platforms, customer relationships and jobs to the greatest extent possible."

According to market research from the Dell'Oro group, quarterly revenue for enterprise telephony has been in decline since Q3, 2007. Avaya and Cisco sit at the top of the pile for revenue, but the difference is close, less than 4%. If Avaya can acquire Nortels enterprise assets, which includes the telephony product lines, channel, and customers, Avaya will leap ahead in market share.

Ron Gruia, Principal Analyst with Frost & Sullivan cautions that if the bid is successful, Avaya will have to be very careful in how they proceed with managing the disparate product lines, for which there is a lot of overlap with Nortels. "Nortel's customers are loyal and they won't just switch out equipment. They will want to amortize their investments. Avaya will have to have a clear roadmap for Nortel customers that Avaya can manage and won't drive existing Nortel customers to writing RFPs when it comes time to upgrade their telephony systems, " Gruia said.That leaves Nortel's other product lines like the switching, routing, security , and wireless products. Getting those product lines would give Avaya a broader portfolio to reach into enterprises, but runs pretty far from Avaya's core strength of voice and unified communications. If Avaya does win the bid, the future of the data networking components will be unclear until Avaya makes a decision.

Avaya didn't have anyone prepared for questions, but  Lynn Newman, media relations for Avaya said "We see this as an opportunity to improve our industry position.  Nortel has strong relationships with system integrators and service providers and an extensive network selling to small and medium enterprises.  We also will increase our global scale and reach.  And we'll strengthen our small and medium portfolio and relationships with government customers."

Of course, Avaya acquiring Nortel is not a done deal. Avaya just set the terms of the deal and other companies can bid for the assets. Who else could be suitor? Gruia suggested MatlinPatterson, a global distressed private equity firm, as one possibility. Rumors have it that MatlinPatterson was going to, or has, bid for Nortel's CDMA and LTE business. It MatlinPatterson, or some other private equity firm take over Nortel, the company could survive in some fashion though under performing business units would likely be cut.

Siemems AG also came up as an interested party. Siemens, Gruia notes has a global presence, but a small foot print in North America. Nortel would give Siemens that foot print as well as access to Nortel's US government business. Gruia thinks we will know by Friday who else, if anyone, bid on Nortel's CSMA and LTE business, which may indicate other interested parties in Nortel's enterprise unit.