Optical/IP Networks

Nortel: Kissing Avaya Goodbya?

Nortel Networks Ltd. has reportedly been outbid for Avaya Inc. by private equity firms Silver Lake Partners and TPG Inc. (Texas Pacific Group), according to news reports on Monday.

The New York Times and Wall Street Journal both reported that Avaya is close to a deal for an estimated $17 per share, which would represent about a 6 percent premium over Friday's closing price and would value the deal at around $8 billion. According to our sources, the deal is likely to be announced after the market's close today.

On Friday, Light Reading, citing unnamed sources, said that the price could be above $20 per share. (See Avaya Close to Deal and Should Nortel Buy Avaya?)

One Wall Street analyst, who asked not to be named, said today that the lower price makes sense: "The price sounds right. $17 is well within the range of what private equity can pay."

According to that analyst, "Nortel can't even reach $17, so why would a private equity group pay more?"

The deal underscores a growing number of private-equity deals for public companies. Just two weeks ago, Alltel was bought by TPG and GS Capital Partners in a deal valued at $27.5 billion. (See Alltel Accepts $27.5B Bid.)

"I think you'll see more private equity investments in public companies. There are not as many startups now, and private equity has to put its money somewhere," says Yankee Group Research Inc. analyst Zeus Kerravala.

Avaya is seen by most as an excellent candidate for a private-equity buyout for several reasons, some of which include its positive cashflow and strong balance sheet.

Analysts say the idea of a private equity buyout is attractive for Avaya. Their reasoning: Avaya's enterprise phone equipment business is predictable; it has an attractive cashflow; and there could be some room for cost savings if it had a more aggressive management that wasn't linked to the legacy Lucent-AT&T business. (Avaya spun out of Lucent in 2000.)

Avaya, too, might flourish if it's not always consumed with pleasing Wall Street. "Avaya is a company in transition," which "may have a better chance as a private company" than as a public one," says Yankee Group's Kerravala.

Other analysts aren't so optimistic and say Avaya's low-growth business may lose marketshare over time. Brean Murray & Co. Inc. analyst Eric Buck says $17 is "pretty rich."

"I'm not sure what a private equity guy could do that they haven't already tried," Buck says, noting Avaya's past restructuring efforts.

Outbid in the deal is Nortel Networks, which some saw as a strategic fit due to the positioning of the companies in the enterprise IP space. But analysts say Nortel may be better off by not having won the auction.

Assuming that Silver Lake and TPG have won Avaya, Heavy Reading analyst Joe McGarvey says, "I think overall it's fortunate for Nortel that it worked out that way."

Avaya holds a 25 percent share of the enterprise phone equipment market, with Nortel holding a 15 percent share. The combination of product portfolios would have created a market leader, surpassing Cisco Systems Inc. (Nasdaq: CSCO), which holds about 25 percent of the market.

Representatives from Avaya, Nortel, and TPG declined to comment on buyout reports. Silver Lake representatives could not be reached for comment.

— Ryan Lawler, Reporter, Light Reading

rjmcmahon 12/5/2012 | 3:07:32 PM
re: Nortel: Kissing Avaya Goodbya? Why doesn't LR do a poll on what one should expect of another who is using their cashflows. For example, assume you guarantee VZ a revenue stream of $130 per month in today's dollars over 30 years. This allows VZ to leverage your productivity and borrow $50K. They can take this $50K and

a) Install a homerun fiber link to a carrier neutral colocation facility initially running at a symmetric 1 GB/s.

b) Install PON, becoming a fourth TV provider to your home, while giving upstream bw of less than 1 Mbs.

c) Pay lobbyists and industry pundits so they can feign competition and do nothing real.

d) Pay themselves a lot of money and secure their pensions for doing nothing real.

e) c and d

f) b, c and d
Pete Baldwin 12/5/2012 | 3:07:32 PM
re: Nortel: Kissing Avaya Goodbya? Our Avaya poll had 323 respondants as of 4:00 p.m. Eastern today.

For the question, "Who do you think should buy Avaya?" the winning answers were:

"Nobody" -- 21%
Nortel -- 20%
Juniper -- 19%
"Sombeody else" -- 12%
Cisco -- 12%
Alcatel-Lucent -- 11%

Ericsson and Nokia-Siemens each rated less than 5%.

I guess the poll is technically still open, so those who want to cause trouble can pump up that Nokia-Siemens rating by going to http://www.lightreading.com/su....
paolo.franzoi 12/5/2012 | 3:07:32 PM
re: Nortel: Kissing Avaya Goodbya?
The minimum upstream you can buy on FiOS is 2 Mb/s. The GbE per home would be most excellent, especially if connected to the Internet with a 56 Kbps modem.

paolo.franzoi 12/5/2012 | 3:07:31 PM
re: Nortel: Kissing Avaya Goodbya?
For you I would connect it with a 50 bps telex link. My point is that having the gigabit link won't matter with the oversubscription.

Luckily, you are incapable of reading about the technologies before criticizing them. So, I think any point you have now made has been shown to be completely invalid.

rjmcmahon 12/5/2012 | 3:07:31 PM
re: Nortel: Kissing Avaya Goodbya? The minimum upstream you can buy on FiOS is 2 Mb/s.

I stand corrected. Look at that, you increased uplink capacity by 100%. Only thing missing is Martin landing on a carrier with a nice "Broadband Mission Accomplished" banner. When can we expect that?

The GbE per home would be most excellent, especially if connected to the Internet with a 56 Kbps modem.

Nobody is building internet backbone's using 56K MODEMs though I'm sure a PON advocate would like people to believe that to be the case. It's a nice red herring used to distract the below par performance of a FiOS architecture.
rjmcmahon 12/5/2012 | 3:07:30 PM
re: Nortel: Kissing Avaya Goodbya? My point is that having the gigabit link won't matter with the oversubscription.

What are you talking about? Of course it matters for all kinds of reasons many which go beyond technical ones.

On the technical side, the only way to take advantage of statistical multiplexing is via oversubscription. There is all kinds of work in variable bit rate encoding of video which reduces user perceived distortions when its transported over a lossy network, hence statistical multiplexing gain can be achieved while video quality is better than that which is transported using CBR networks.

Seven, we're transitioning to a digital world with compute processing on all the ends. Let's not shove this FiOS PON crap down everyone's throat for $50K a household. Sure, you may pocket the dough but it's a scam for everyone else.
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