Questions and answers as to what a deal would mean to the industry and users.
While rumors swirled that Avaya was on the block, a report this week in The New York Times says a $8 billion deal with private-equity firms Silver Lake Partners and Texas Pacific Group could happen very soon. Should the deal go down, what does it mean?
Avaya agreed to a $8.2 billion merger with private-equity firms Silver Lake Partners and Texas Pacific Capital. Here’s what Avaya going private means to users of its technology, and the market.
So, why would Avaya want to go private?
Analysts say Avaya could be looking to get maximum value while the getting is good. Its stock is up around 40% since April, and is almost double what it was 52 weeks ago.
“[Avaya] is just trying to figure out what would bring the most value for their shareholders,” says Samuel Wilson, an analyst with JMP Securities.
“One of the problems that [Avaya] has chronically had is no sex appeal,” Wilson says. “That’s kind of how investors have always thought about it — it’s no fun.”
By going private, Wilson says, Avaya could “do some things out of the public eye” to revamp itself as a more streamlined, appealing company for investors. Slashing the company’s legacy TDM business or selling it off is one potential move.
“They’re supporting two product lines — legacy TDM products, and next-generation IP products,” Wilson says. “They need to ramp down all support, and end-of-life the TDM stuff and focus on purely on IP.”
What are the details of the merger?
Silver Lake Partners and the Texas Pacific Group are paying $8.2 billion for Avaya, although the companies are not saying how much cash each put up. The deal gives Avaya shareholders $17.50 in cash per share — a 28% increase over Avaya’s stock price when news of a potential deal surfaced last week. The deal, subject to shareholder approval, is expected to close this fall. Texas Pacific Group has over $30 billion under management and co-owns Freescale Semiconductor, among other IT/technology companies. Silver Lake Partners owns Flextronix, Sabre Holdings, Seagate and IT analyst firm Gartner.
What are Avaya’s financial and market situations?
While Avaya has had some rocky years since its spinoff from Lucent, the firm is in good shape financially and in terms of competitive positioning. The VoIP vendor made $5.2 billion in revenue and $220 million in profits in its last fiscal year, and is worth $6.2 billion overall. Depending on how you slice the market, Avaya is the leader in overall enterprise telephony and enterprise IP telephony products and services revenue — which combines TDM, IP-based, and hybrid business phone equipment, software and services — ahead of rivals Cisco and Nortel. (Although Cisco is the leader in enterprise IP telephony equipment sales).
Would a Nortel or Cisco acquisition of Avaya make sense?
The answers are probably not and definitely not, for Nortel and Cisco respectively.
“I think Nortel is sort of looking to get good deal [with Avaya], and if the got a good deal, they would have taken it,” says JMP’s Wilson. “Nortel in the enterprise needs to figure out if they’re going to get bigger or give up. That’s what they’re struggling with right now.”
Nortel, once a toe-to-toe competitor with Avaya, has fallen to third in enterprise telephony and IP telephony behind Cisco.
As for rumors of Cisco’s interest in Avaya, observers are even more skeptical.
“Cisco, not a chance,” says JMP’s Wilson. The company has too much product overlap and is not the type of buy the vendor makes.
How would a private-equity buyout affect users?
Organizations with heavy investments in Avaya say they are not concerned about near-term consequences of a buyout. But long-term plans may hinge on what happens to the firm if it decides to do a makeover of itself under private-equity management.
“I wouldn’t anticipate any short-term changes because the Avaya product line is so strong.” says Scott Mah, assistant vice president for IT infrastructure at the University of Washington in Seattle, a large Avaya shop. A major TDM product end-of-life or a strategic refocus on Avaya’s part could mean the organizations would go with another provider of both TDM and VoIP technology. “It’s something we’ll have to do due diligence on” if something does happen, he says.
Versus a buyout from a competitor, the Silver Lake/Texas Pacific Group deal would be preferable to users, says one observer.
“That’s probably one of the least disruptive scenarios,” for Avaya customers, says Bern Elliot, an analyst with Gartner. “Even there, private equity does change things. . . . It usually means they’re sprucing it up to do something else with it.”
What is the state of the IP telephony market, and what is the outlook for Avaya and others?
Right now, it’s good to be in the enterprise VoIP business. The Dell’Oro Group says shipments of IP telephony lines grew 40% in the first quarter of 2007 vs. the same period a year ago. Synergy Research Group says 64% of all telephony gear revenue is for IP products or hybrid IP/TDM, vs. pure TDM, phone switches.
“Right now the market is doing well,” says Gartner’s Elliot. “There’s change in the wind for everyone in this industry. Companies are aware of that,” he adds, however. Emergence of smaller players, such as ShoreTel, and open source VoIP alternatives to PBX big iron, such as Asterisk, are changing how people think about corporate VoIP networks. Microsoft’s aspiration to assume enterprise VoIP as a function of its back-office server family — in the form of Office Communications Server 2007 — is another factor.
