Avaya Wins Auction For Nortel. What's Next?

If you have been following the Nortel break-up, you know that Avaya won the stalking horse bid for Nortel. The final price is $900 million, a bit less than twice Avaya's initial bid of $475 million, and encompasses all of Nortel's Enterprise assets including unified communications, switching and routing and security product lines. The deal also includes approximately $15 million for employee retention. Nortel expects the court to approve the deal this week and close by the end of 2009, pending regulatory approvals in the US and Canada.

One of the hurdles is Verizon's decision to attempt to block the sale due to uncertainties the telecom giant has over existing Nortel support contracts—a problem that Avaya needs to address. Waving the flag of national security in a post 9/11 world, their gambit seems a bit of a stretch, but from a practical standpoint, maintaining existing support contracts is something any company that acquired Nortel would have to take on.

"As we work through integration planning, it is business as usual, and we will continue to focus on supporting our installed base," Joel Hackney, President of Nortel Enterprise Solutions, said. "Through deal closure and beyond, we will deliver on our stated customer commitments and maintain high levels of service and support. We will ensure our customers can fully leverage their existing Nortel investment as they benefit from the complementary capabilities of the Nortel and the Avaya portfolio of products and services." Hackney expects that Avaya and Verizon will reach an agreement and that Verizon's filing won't hamper the deal.

Like most executives, Hackney continued to talk up Nortel's accomplishments. Nortel hasn't been sitting idly by during the break-up, continuing its R&D push on 40 and 100GB trials and announcing several successful submarine cable trials that stretch distances for high capacity networking over existing fiber. Granted, the assets used in the trials are not part of the enterprise auction, but it all gives credence to Hackney's statements about on-going development.  

Hackney said on the conference call that a minimum of 75% of Nortel employees will be retained by Avaya, but in a letter sent to employees posted at All about Nortel, he further qualified that statement, saying, "Outside of Nortel Government Solutions employees and those employees in countries where ARD [Acquired Rights Directive] or similar laws apply, we expect that a minimum of about 60% of the remaining Enterprise Solutions workforce will be offered employment with Avaya." The ARD is a European Union directive defining employee rights during an acquisition or transfer of assets.Avaya's own response is somewhat circumspect. Avaya's short response in a press release said, "Our successful bid brings us closer to adding Nortel and its complementary channel, portfolio, research and development, and global presence to Avaya," said Kevin Kennedy, president and CEO, Avaya. "We believe the acquisition brings inherent value to both organizations' customers, employees and partners, and we look forward to its successful conclusion." 

Getting Nortel's global channel and US Federal Government business is a big win for Avaya. According to Dell'Oro Group's recent 2nd quarter, 2009, Enterprise Telephony Report, Avaya was already the market leader in manufacturing revenue which includes IP phones, PBX lines, legacy phones and applications, with 16.3%, while Cisco had 13.7% and Nortel had 10%. Combining Nortel's assets with Avaya's leapfrogs the company far ahead. No one wants to talk about the overlap in the company's product lines--preferring to discuss the complimentary aspects instead. But that ignores the fact that Nortel's enterprise telephony lines do compete with Avaya's. As Ron Gruia, Principle Telecom Analyst at Frost and Sullivan, noted back when Nortel announced Avaya as the stalking horse bidder, "Expect a lot of streamlining. Avaya can't expect to manage 25 lines of phones."

The switch and router business is another matter. Nortel is barely a player in the enterprise switch market. While getting a switch product line may seem good for Avaya, they will have to compete with an existing install base of Cisco and HP switches. That is a tough, uphill battle that simply may not be worth taking on.

What Avaya does long term is anyone's guess. Avaya has had a jump on planning the integration of the two companies and hopefully we will find out more in the coming months.