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The Avaya sale: Tech buyouts bear risks for customers, too

Private equity firms seek quick profits diminishing focus on products
By Tim Greene and Phil Hochmuth , Network World , 06/05/2007

The sale of Avaya is just the latest in an increasing number of private-equity buyouts of technology companies that might not be good things for customers.

The $8.2 billion deal announced today will take the company private and likely come with financial burdens that could sap the market-leading seller of corporate telecom gear of money needed to keep the company’s edge, experts say.

Equity firms like tech
Sprint’s merger with Nextel will solidify the carrier’s position as the Recently, private equity firms have shown more interest in snapping up technology companies — traditionally a higher-risk business sector than these investors like to dabble in.

Date Company bought Buyer Amount
6/4/07 Avaya TPG Capital and Silver Lake Partners $8.2 billion
5/30/07 CDW Madison Dearborn Partners $7.3 billion
5/21/07 Alltel Goldman Sachs and TPG Capital $27.5 billion
5/16/07 Acxiom Silver Lake Partners and ValueAct Capital $3 billion
4/17/07 Primax Electronics Hong Chuan Investment $250 million
4/5/07 First Data Corp. Kohlberg, Kravis, Roberts & Co. $29 billion
Click to see: Equity firms investments chart

"When private equity shows up it's more about financial engineering, than it is about sort of products and synergies and those sorts of things,” says Samuel Wilson, an analyst with JMP Securities.

“Typically these deals load the company up with debt with significant restraints on operations and cash flow and demands for a better output,” says Francis McInerney, managing director of North River Ventures. “Technology development falls off because cash flow goes somewhere else.”

Over the past year, private equity firms seem to be buying up more technology companies, such as Avaya, Agilent Technologies, Alltel, First Data, CDW, Acxiom Corp. and Primax Electronics to name a few.

The good news is that if things do go awry, they usually happen slowly and they don’t send products or services into a tailspin. “It could be slow at first. It could be imperceptible,” McInerney says.

Technology companies are regarded as iffy investments because the products and the markets are so complex, experts say. But with an abundance of money to invest, the equity firms are willing to take more risks, he says. “It shows desperation on private equity’s part looking for deals, and at some point you run out of the deals private equity ideally looks for,” McInerney says.

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Avaya alternativeBy Jerry Bloom on May 13, 2008, 7:46 pmHi Anonymous, I am the CEO of Blue-Wireless developers of 'SoftBX'. I only just came across your comment re the Avaya buyout so I understand you may have already...

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BuyoutBy Nell on November 14, 2007, 9:37 amWhen will we receive the 17.50 cash buyout?

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Business Partner ExperienceBy Anonymous on September 8, 2007, 11:35 amAVAYA is placing an emphasis on software development - who isn’t? Isn’t that the future of enterprise communication? In a world that demands more open architecture,...

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RE: What the buyout means to me?By Anonymous on June 9, 2007, 12:43 amYou do know that Cisco sells primarily through distribution that way too...

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What the buyout means to me?By ac on June 8, 2007, 12:15 pmTheir goal is to become a software oriented company. My company is knee deep in Avaya as with most of the enterprises out there, but I've had a serious grip with...

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