A Win for Nortel?

By Mark Evans | Published: June 5, 2007

After much speculation and excitement about Nortel’s interest in buying Avaya, the winners of the Avaya sweepstakes are two private equity firms, TPG Capital and Silver Lake, which agreed to pay a cool $8.2-billion, or $17.50 a share. In many respects, this could be considered a win for Nortel as well because the company can continue to focus on fixing itself/restructuring without the distractions of having to integrate a $5-billion a year business. At the same time, Avaya did not end up in the hands of a competitor such as Cisco. In fact, you could argue Avaya going to a private equity investor is a great move for Nortel because TPG and Silver Lake will probably start to slash Avaya’s operating expenses to increase cash flow so they can finance the deal.

For Nortel watchers, the interesting thing is Nortel’s apparent interest in Avaya. Does this mean Nortel is ready, willing and able to make a multi-billion dollar acquisition? If so, what other targets could be on its strategic wish list?

Update: Now that Nortel has missed out on Avaya, analysts are chiming in that it’s good news. RBC Capital Markets’ Mark Sue said even “if it were financially possible, an acquisition of Avaya by Nortel would likely have been messy, fraught with integration issues”, while UBS’ Nikos Theosopoulos said it would have been difficult for a combined Nortel-Avaya (Noraya) to find synergies/cost-savings in areas such as product development and supply chain. (Hat tip to Telephony Online)

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  • Turning Leaf

    I would suggest that Nortel should buy a fruit company of some sort…

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  • Apple

    Nortel did not have a chance to win AV.
    Did Mike know it.
    Sure he did.
    Did I know it. Sure I did.
    So why do we have idiotic discussions why Nortel didn’t get Avaya?
    Mike Z was doing the window shopping, or if you want another comparison, he wanted to know Avaya from inside. /sneak peak preview/ He is maybe interested in parts of Avaya, so he can make an offer to Silver Lake later on….
    Or if you think that idea of consolidation of NT and AV is good, let Silver Lake do it.
    In other words, let Silver Lake acquire NT now.

  • Casual Observer

    Apple hit the nail right on the head. I think the private equity guys may go after Nortel provided they can find a Canadian based financing partner since Canadian law requires it.

  • Mark Evans

    Canadian foreign ownership rules don’t apply to Nortel – only telecom carriers – so if a U.S. private equity firm wanted to go after Nortel, there’s really nothing stopping them. That said, the Canadian government has supported Nortel in a huge way so you know they would be leery of anyone coming in and gutting Canada’s flagship tech company.

  • A Close Observer

    I’m not sure how you can make a “win” out of an inability to pull off an acquisition in one of Nortel’s highest priority markets.

  • curious

    Well they drove up the price and the acquisition was not made by Cisco .. I wouldn’t call it a loss either

  • A Close Observer

    Nortel lost out on an opportunity to consolidate the market in one of its key areas of business focus, and it lost out on this opportunity due to an inability to pull off the acquisition.

    Nortel is currently, and for the foreseeable future, in the position of dancing to the tunes played by its competitors. It lacks the critical mass to more ably influence markets. And in this case, it lacked the financial resources to influence its future.

    There is no way this can be twisted into a “win”.

  • Please

    The *last* thing Nortel needs is more 20th century legacy products to support. Yes, sitting this one out is a Win.

  • A Close Observer

    I beg to differ. Consolidating Avaya’s and Nortel’s embedded base of customers would have given it a nice critical mass in the enterprise market – something is currently lacks in its battle with Cisco.

    Avaya also has a large services revenue stream, which would have nicely bolstered Nortel’s nascent Global Services business.

    One of the reasons the private equity firm likes Avaya is because of it’s lack of debt, and it’s a cash machine. Both of those attributes would have been assets to Nortel…if it had the ability to pull off an acquisition.

    Having a larger installed base of “20th century legacy products” is, indeed, an asset (1) in the services revenue it generates and, (2) in lowering the barriers to migrating customers to newer VoIP solutions (it’s much easier to sell to existing customers)…if one has a portfolio of competitive solutions. We can debate the competitive strength of Nortel’s enterprise portfolio ad infinitum, but I suspect the market will have the final say on that issue.

  • The psychiatrist

    There are many othr opportunities for Nortel to aquire added market share,I agree with analysts that overlap would have been a huge issue.

    Another way of looking at Nortel losing out to SLP was the fact that they would have paid $8 billion+ for $5 billion in added revenue of which has its own issues to deal with, which of coarse would have required additional capital investment to find whatever synergies the acquisition would have produced.

    For close to $9 billion of which it would have cost Nortel,I m sure there are many other opportunities availiable to Nortel in that price range,heck even the mighty CSCO’s last huge acquistion was a paltry $6 billion for Scientific Atlanta.

    Two factors we can deduce from this latest attempt by Nortel to acquire Avaya:

    1)We know that Nortel is serious about its Enterprise divsion

    2) Management feels confident enough to go shopping, albeit with both cash and stock as currency

    Although nothing has been mentioned of late with respect to Siemens’ Enterprise unit,I’m sure that Nortel may be taking a closer look at them in light of losing out on Avaya .

  • Native

    I think it would have been a mistake. After dumbing down pensions and retiree healthcare in North America an expensive acquisition which delivered few new services/products to the bottom line would not help Esat at Nortel.

  • many

    It worth considering that at&t is a *huge* reseller of avaya (HUGE). Some of the biggest companies on the planet use an at&t+Avaya combination to manage not only their network facilities but moves add and changes. Some have left and gone with cisco, and some notable ones have come back.

    I still have doubts nortel could pull off an integrated company, however the combination if done correctly, could be powerful.

    Siemens enterprise unit has dents alll over it where people have been touching it with 11 foot poles. Nortel would be very foolish to even consider siemens. Besides the deal ain’t done till the fat lady sings. We may still see some additional chapters to the avaya saga.

    What nortel *really* needs is an access partner to fill their end-to-end solution gap.

  • Casual Observer

    “We know that Nortel is serious about its Enterprise divsion”
    –

    I’m still not convinced this is the case. I think the area of emphasis is enterprise IP voice and not data. From a margin standpoint, IP voice products are experiencing a lot more pricing pressure than IP data products (as evidenced by Cisco and Juniper’s margin strength). I’d say Nortel has multiple gaps in their enterprise portfolio is doing all it can without actually making an acquisition because they can’t really afford one. Nortel is trying become an enterprise network services provider. It will be interesting to see how this plays out. Nortel may be able to take market share away from other consulting companies that have crowded this area because of its core competency in networks.

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