Avaya Antes Up $475 Million For Nortels Networking Line

Light is finally being seen in the dark tunnel that Nortel customers recently experienced. Avaya plans to acquire its rivals network equipment business unit and establish itself more firmly as a top provider of unified communications products to small and medium businesses. However, the fate of Nortels switch and router product lines is less clear.The purchase underscores the volatility in the network equipment market, where vendors have been squeezed by maturing product segments, declining margins, and the recent economic downturn. Overwhelmed by those issues, Nortel filed for Chapter 11 last December and has been selling off its various business units to worthy suitors. Avaya is now poised to take over Nortels network business -- although the transaction still has to be approved by the U.S. Bankruptcy Court for the District of Delaware.

Upon final approval, the pairing would create a significant force in the unified communications marketplace with about 25% of the total market share, good enough for a first place position. The companies also have a storied history in voice communications and can use their technical expertise to drive Unified Communications adoption in small and medium businesses. However, the two companies will need to merge their disparate product lines and eventually outline a strategy to migrate Nortel customers to Avaya support and products with minimal disruptions  no small feat.

In addition, it is unclear what will happen with some Nortel product lines. In 2007, Avaya was struggling and opted to go private, buying back its stock. Silver Lake Partners and the Texas Pacific Group financed the move with the goal of deemphasizing Avaya's networking hardware and focusing on software to keep the company afloat long term.

But in acquiring Nortel, Avaya also gains a variety of routers and switches (used by many small and medium businesses). With margins shrinking on network hardware and Avayas growing emphasis on software, it is unclear what will happen to these products long term and that should concern Nortel customers. In effect, they found out who will decide their fate but still have to wait and see what that fate will be.