Nortel purchase to test Avaya big time

Combined Avaya-Nortel portends a battle with Cisco for unified communications supremacy

2010 should be a watershed year for Avaya, which has been reinventing itself for the past three years and is just about to take on the challenge of acquiring and integrating the enterprise assets of Nortel.

The industry is awaiting Avaya's promised product road map and migration plans for current Nortel customers over to Avaya products. That announcement is due within 30 days after the closing of the deal, which has approval of regulators in the United States, Canada and the European Union. Avaya says it expects finalization by the end of 2009.

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Since one of Nortel's biggest assets is its customer base – its installed PBX base is the industry's largest – Avaya has to do what it can to transition them into being long-term Avaya customers if it wants to reap full value from the deal.

"Avaya needs a clear road map," says Zeus Kerravala, an analyst with the Yankee Group. Avaya and Nortel combined have significant overlap with their voice products that they will have to sort out, he says. Some of the decisions will be based on which company has the superior technology; some will be based on how readily the products integrate into the overall line, he says.

Perhaps the biggest decision is what to do with Nortel's switch and security portfolio. If Avaya keeps it, the company could integrate the gear with its voice products to support more features, Kerravala says. "That would make Avaya an end-to-end player," he says.

Avaya already licenses call-control features to switch vendors Extreme and Foundry (now Brocade), giving them that functionality. But if Avaya wanted to be aggressive, it could introduce similar features in the Nortel switches and promote sales with deep discounts to customers that buy Avaya unified communications gear.

Customers might like the option because it would mean one less vendor to deal with, says Alan Weckel, director of Dell'Oro Group. Configuring VoIP would be easier as would troubleshooting, because a single vendor could deal with problems, he says.

The flip side is that dabbling in switches could be a distraction from Avaya's stated main line of business - unified communications packages.

While conventional wisdom says Avaya will keep its own products when faced with the alternative - jettisoning them in exchange for Nortel products - there are some areas where Nortel's gear may prevail, Kerravala says. For example the Nortel CS 2100 communication server is a scaled down version of a carrier-grade IP PBX that can support 120,000 simultaneous calls and 99,999 call agents. This hardware platform may also be valuable in that it has certifications that make it acceptable to U.S. government agencies.

Also, Nortel's Agile Communication Environment (ACE) software architecture may survive, he says. It can inject communications features such as instant messaging and click-to-call into business applications – a cornerstone of unified communications. It might fit well with Avaya's existing DevConnect partner program to promote third-party software integration, he says.

Separate from the Nortel deal, Avaya has been redefining itself as a software company and improving sales and support infrastructure. Two CEOs in the past two years – Kevin Kennedy and Charlie Giancarlo, both Cisco alumni – have swept in a new management team and overhauled the sales staff. These efforts have resulted in improved customer service, Kerravala says.

But integrating acquisitions into existing companies is a difficult task that has bested some acquiring companies. One rule of thumb is that attempting to bring companies together effectively stalls both of them out for a year or two.

Avaya may have an advantage in this area because Kennedy, who is known for his operational discipline, and many of his key executives hail from Cisco, which has a high batting average for acquiring companies and fitting them in effectively with the mother corporation.

Todd Abbott, senior vice president of sales and president of field operations, worked in sales and marketing at Cisco. Alan Baratz is senior vice president and president of Avaya Global Communications Solutions and formerly was in charge of Cisco's software group that oversaw IOS.

Another executive, Mohammed Ali, senior vice president of corporate development, worked at IBM where he integrated the company with three other vendors that it acquired: Cognos, FileNet and Ascential.

Beyond being a source of Avaya executives, Cisco is also Avaya's chief rival in unified communications, Weckel says. Cisco came in No. 1 for sale of phone-line equivalents in the third quarter of both 2008 and 2009, according to a recent Dell'Oro study. Avaya came in second and Nortel placed third. Combined, Avaya and Nortel would have buried Cisco by 11.7 million to 6.7 million in the third quarter of 2008, and by 2.4 million to 1.4 million in the third quarter of 2009, Weckel says.

If gauged by revenue, Avaya ranked No. 1 for the third quarter in both 2008 and 2009, he says. Combined with Nortel, Avaya would have extended its lead over Cisco in the third quarter of 2008 to a total of $2.11 billion vs. $0.95 billion for Cisco. The results for the third quarter of 2009 would have been $400 million for Avaya/Nortel to $205 million for Cisco.

No vendor has had more than 15% of line shipments, Weckel says, but in the third quarter of 2009, Avaya/Nortel would have cornered 21.3% of the total to Cisco's 13.2%. "That's uncharted territory," he says. "The merger will set the bar higher for Cisco."

Considering that Cisco wheeled out its first VoIP call server in 1998, it has made remarkable progress, he notes. In 2007, it was No. 3 in line shipments and is No. 1 today. "Is that lead defendable or could Cisco reach it?" Weckel asks.

One possible advantage for Avaya is that it is privately owned so it doesn't have to respond to the expectations of Wall Street, which gives the company some breathing room and the chance to implement strategic moves without showing immediate bottom line results. But with Cisco breathing down its neck, it can't afford to waste time.

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