A Take on the Avaya Enterprise Deal

Here’s a guest post from Jeff Wiener, who runs Digitcom, a telecom equipment reseller. Jeff also writes The Telecom Blog, one of Canada’s leading telecom-focused.

It’s been a long downhill battle for the last many years. Nortel has been languishing in the business sector, their prized business hampered by years of poor management and financial crisis. It’s a rather unfortunate end for Nortel, the staff, customers, dealers, and the Telecom market in general.

But, every cloud has a silver lining.

The Silver Lining: Every industry needs healthy competition, and Nortel brought that in spades for many years. Healthy competition spurs innovation, lower prices, and a spirit to win. At this point Avaya’s purchasing Nortel is a reflection of the consolidation happening in the marketplace, making way for Telecom 2.0 and the changes to come. On one side, competition is healthy, and one the other, so is consolidation; It will make way for stronger players in the CPE space. That’s the silver lining.

Nortel was a Canadian telecom institution. Actually, Nortel was a telecom powerhouse. And there isn’t much more Nortel left to go around, especially with today’s announcement that Nortel’s enterprise business unit has been sold to Avaya for US$900 million in cash, with an additional pool of US$15 million reserved for an employee retention program.

The Nortel business units left are Metro Ethernet Networks (MEN), the carrier business (including VoIP), the stake in the Nortel-LG joint venture, and the LTE patents, which weren’t part of the Ericsson deal.

Some of the main highlights of this deal include:

– Nortel will sell the assets of the Enterprise Solutions Business, and shares of Nortel Government Solutions and DiamondWare to Avaya
– Avaya to Pay US$900 Million in Cash to Nortel, with an Additional Pool of US$15 Million Reserved for an Employee Retention Program
– Canadian and U.S. Court Approvals of Sale will be Sought at a Joint Hearing on September 15

It’s hard not to be somewhat nostalgic about the sale of the enterprise division, especially given it’s business history. Nortel’s origins date back to 1882 as a manufacturing arm for the Bell Telephone Company of Canada, and they were incorporated as a separate company in 1895 known at the time as Northern Electric.

Unfortunately, both Nortel, and their technology has been lagging in the market for some time – quite a difference from only a decade ago when Nortel was the largest company by market CAP in Canada, their shares making up over 25% of the Toronto Stock Exchange’s main composite index.

In the last few years, Nortel began losing market share, and now Avaya needs to stem that tide, consolidate business operations, and hopefully for Avaya, remain profitable. In the best of times this is a huge task. Under these circumstances, GARGANTUAN.

Avaya is a large telecom player, and it certainly has the resources and brains to make this a success – it won’t be an easy task though.

Something about this auction process that has me somewhat surprised is Cisco’s lack of presence or mention at the bargaining table. Cisco is the undisputed worldwide leader in voice and data technology. At one time Nortel was their biggest competitor. And it seems that Cisco has almost ceded their fate into someone else’s hands.

With the addition of Nortel, Avaya is now the number #1 voice player, by far, and now has control over Nortel’s switches and routers, clearly stepping into Cisco’s sandbox. Clearly the folks at Cisco were aware of this. I suspect they decided to let Avaya take control over this asset, mess it up, and then clean up the mess. I can’t think of any other reason why they weren’t at the table.

Either way, today marks the end of a telecom dynasty, and the beginning of a new one.

What are your thoughts ? Is this a good move for Avaya ?