Optical/IP Networks

Avici, Nortel Get 'Strategic'

Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) has formed a "strategic relationship" with Nortel Networks Corp. (NYSE/Toronto: NT) based on the resale of Avici's core routers (see Nortel, Avici Announce Partnership).

The deal, hinted at earlier this week by Light Reading (see Nortel/Avici: Getting Together?), includes a three-year agreement in which Nortel will integrate, sell, and support Avici core routers. Avici will be Nortel's "preferred partner" for IP core routers. The partnership is a step beyond the normal reseller agreement, in that Nortel and Avici will perform operations, administration, and maintenance (OA&M) work together, and in that Nortel has warrants, or options, to buy 800,000 shares of Avici stock if the relationship proceeds favorably.

Nortel already owns a stake in Avici amounting to less than 5 percent of the company.

The news sent Avici's share price soaring, up $3.66 (35.05 percent) to $14.10 in early trading. The stock closed Wednesday at $10.44, up 23 percent, or $1.96, from Tuesday's close.

Nortel's share price was up by 20 cents, or about 3.5 percent, in early trading. It had risen steeply Wednesday following news of a deal with Verizon Communications Inc. (NYSE: VZ) (see Nortel Soars on Verizon VOIP Deal).

Under the terms of the agreement, Avici has granted Nortel a warrant to buy 800,000 shares of Avici common stock at $8 per share. The warrant is "exercisable after seven years," but that timescale might be brought forward if Nortel achieves unspecified "performance milestones."

In a conference call announcing the deal, Avici president and CEO Steve Kaufman said the deal will "greatly expand Avici's opportunities with carriers," and that the two vendors have a joint solution ready for operators "from day one."

Nortel's president of wireline networks, Sue Spradley, said in a separate interview with Light Reading that the deal was in part driven by the new opportunities being created by the convergence of voice and data networks using IP and MPLS technology.

"There are a lot of market opportunities and RFPs out on the street," says Spradley. "This is all about the timing of the market. There are a lot of requirements for carriers to put services on the IP/MPLS core. We are taking our sales force and [Avici's] sales force and actively pursuing the deals that are out there. This is a very strategic partnership."

For those who'd like to brush up on this all-important trend, Heavy Reading, Light Reading's independent research arm, last fall published the definitive report on the convergence trend: Setting a Course for Convergence.

Both companies tried to downplay the effect of this deal on their current OEM agreements. Avici has a reseller deal with Huawei Technologies Co. Ltd., and Nortel has a reseller relationship with Juniper Networks Inc. (Nasdaq: JNPR).

"We have an OEM relationship with Huawei, and we will continue that," said Kaufman. That being said, Kaufman gushed that the Nortel relationship is "global in scope and reach."

Despite this posture, it's not likely that Nortel's new partnership will do much to cultivate its relationship with Juniper. In fact, the decline of that relationship over time is likely what drove Nortel to find a partner in Avici.

"We don't sell Juniper in the core today anyway," said Spradley. "It doesn't really have an impact on [our relationship]. We're doing an OA&M relationship with Avici, which is much more strategic." The big question, of course, is whether this deal will lead to Nortel acquiring Avici. That will likely depend on whether the companies have success selling routing products together. Nortel's 800,000 warrants vest over seven years, and the acceleration incentive would allow Nortel to buy another chunk of the company if things go well.

There may, in fact, be one particular RFP on which the partnership is focused in the short term, say sources. Stay tuned.

— Ray Le Maistre, International Editor, Boardwatch, and R. Scott Raynovich, US Editor, Light Reading

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materialgirl 12/5/2012 | 2:44:23 AM
re: Avici, Nortel Get 'Strategic' NT had to partner with somebody to get a core IP router, since they lack one of their own. I wonder how much better an NT/AVCI integration could be at this point than an NT/JNPR job. At least they have worked with JNPR for longer.

Just what kind of packets are going to be in this VZ network, anyway? As I understand it, NT calls their ATM-based Passport systems "packet", which they are, but ATM is not IP. The issue I have is when they use "VoIP" in the next sentence. They should just say "VoP" for "Voice over packet". Just how smart a buyer is VZ?
Lopez 12/5/2012 | 2:44:22 AM
re: Avici, Nortel Get 'Strategic' It must be 1999 again because Nortel's stock is up and they're partnered with Avici.

Seriously though, the Nortel - Avici relationship didn't work last time, why will it work this time?

Has anyone other than AT&T deployed Avici?

They were better off with Juniper.
Rick.H 12/5/2012 | 2:44:20 AM
re: Avici, Nortel Get 'Strategic' >They were better off with Juniper.
NT/Jnpr relationship never worked out. It got even worse with Unisphere aquision.

romeo-foxtrot 12/5/2012 | 2:44:14 AM
re: Avici, Nortel Get 'Strategic' This sort of announcement smacks of the constant re-qrite of strategy that was evident in the Clarence/Roth days.

Why did Nortel cease their original partnership with Avici?

Why are things different now?

What's happended to the re-sale relationship with the #2 IP player Juniper?

Why is an Avici relationship better than one with Juniper?

Nortel has NEVER been able to develop a fruitful long-term partnership with complementary vendors the way other companies, such as Nokia, Ericsson, or Siemens have. NIH from R&D and stupidity from sales have always screwed things up, and expect this to go the same way.

And if Nortel acquires Avici, that would only be their 4th attempt to have an IP core product (Remember Versalar and OPC?).
konafella 12/5/2012 | 2:44:04 AM
re: Avici, Nortel Get 'Strategic' VoP? I won't argue that the Passport isn't an ATM switch - it is. But I thought the Passport actually did encapsulation of voice DS0s into VoIP and then encapsulated the IP datagrams into ATM cells (using 1483?). No? Is it simply VoATM?

Rick.H 12/5/2012 | 2:44:04 AM
re: Avici, Nortel Get 'Strategic' >Nortel has NEVER been able to develop a fruitful >long-term partnership with complementary vendors >the way other companies, such as Nokia, >Ericsson, or Siemens have. NIH from R&D and >stupidity from sales have always screwed things >up, and expect this to go the same way.

It was mainly management issue with Nortel: NT R&D had a close relationship with Juniper's R&D and NT Sales tried and successfully sold Juniper. However Sales Rep. were not even commissioned on Juniper routers sales- How could you expect success in this case. Not sure that they won't screw up again Avici things in coupe of months....

dispersion compensator 12/5/2012 | 2:44:00 AM
re: Avici, Nortel Get 'Strategic' Right!

PO 12/5/2012 | 2:43:56 AM
re: Avici, Nortel Get 'Strategic' "Just how smart a buyer is VZ?"

I'm sure Verizon knows what they bought. But they also know how to help spin a tune or two. And we may never know for sure.

And Nortel has been in bed with Avici since before Juniper went public. But the downturn split them apart, too. Glad to see old friendships restored.

I've worked on deals that some could consider as being oversold (as a technical expert advising on what was very do-able, not as a salesman pushing the pitch); while I doubt that Nortel is an entirely different beast today than it was then, I do doubt that this deal has seen more promised than is possible. What I've heard about the deal was within the realm of the possible 30 months ago.
BobbyMax 12/5/2012 | 2:43:55 AM
re: Avici, Nortel Get 'Strategic' This deal is very harmful to yhe interests od Nortel. Having been urnt by its deal with Motorola has not learnt his lessons. Similarly, the company was burnt by Xros when it acquired it for $4.2 Billion.

Avici was selling its routers to AT&T, but AT&T has cancelled its contract with Avici. Avici all optical switches are not in demand. Similarly routers/optical routers are in demand.
6381891 12/5/2012 | 2:43:50 AM
re: Avici, Nortel Get 'Strategic' it does both...
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