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Optical/IP

Should Nortel Buy Avaya?

With a possible buyout of Avaya Inc. in the works, analysts see an opportunity for Nortel Networks Ltd. to strengthen its enterprise business and create potential cost savings by combining the two IP telephony businesses.

According to The Wall Street Journal, Avaya is in discussions with public and private bidders to sell all or a part of its business. A buyout of Avaya would highlight continued consolidation in the telecom equipment market, following megamergers like that between Alcatel and Lucent last year. However, unlike Alcatel-Lucent (NYSE: ALU), Avaya operates primarily in the enterprise space, which thus has far been mostly untouched by consolidation.

In a research note issued this morning, Prudential Equity Group LLC analyst Inder Singh wrote, "We believe the enterprise telephony space is ripe for consolidation, where a large number of competitors continue to face off in the midst of a worldwide market transition to IP telephony."

Rumors of a sale circulated as Avaya postponed its analyst-day meeting, originally scheduled for May 31, which it has yet to reschedule. According to news reports, companies mentioned in connection with a possible sale include Nortel, Cisco Systems Inc. (Nasdaq: CSCO), and private equity firm Silver Lake Partners .

Perhaps most interesting of these possibilities would be a purchase by Nortel, which has seen its share of the IP telephony market fall sharply over the last several years. According to sources in the WSJ, talks between Nortel and Avaya have been ongoing, but cooled recently due to disagreement over price and whether Nortel would pay for Avaya in cash or stock.

JP.MorganChase analyst Ehud Gelblum wrote in a research note today that "a combo cash + stock deal – which seems the most likely of scenarios – would require somewhere between 11 percent and 18 percent opex cuts for NT to offer a 15 percent premium and still have an acrretive deal."

Even so, a Nortel-Avaya mashup could make sense, analysts say, as it would bring more of an IP enterprise focus to a Nortel business that is currently very dependent on legacy product offerings. Sales of networking equipment to corporate customers make up about 25 percent of Nortel's revenue, but according to Singh's research note, the company has seen its share of the IP telephony market fall below 15 percent.

Nortel could have difficulty competing head-on in Cisco's core market alone. However, a combined Nortel-Avaya would be the market leader. Singh estimates that such a combination would "create the dominant vendor in N. America (35 percent total telephony share), EMEA (22 percent share), and S. America (30 percent share), and [would create] a stronger presence in Asia (11 percent share)."

In a phone conversation with Light Reading, Singh said, "I think Nortel has made it clear that they see value in the enterprise and will invest in it" organically and through acquisitions.

Due to a joint venture between Microsoft Corp. (Nasdaq: MSFT) and Nortel earlier this year, Singh also believes "a strategic deal would make tremendous sense for the industry, for Avaya, and for Nortel" because it would bring together three of the largest players in the business. (See Nortel, Microsoft Partner.)

A Nortel-Avaya deal could also fit in with Nortel's restructuring and cost savings plans. Analysts say that with the overlap between the companies' IP businesses, there are more potential cost savings than Nortel could provide on its own in the enterprise space.

Representatives of Nortel could not be reached. An Avaya spokesman declined to comment, saying the company "doesn't comment on rumors or speculation in the market."

— Ryan Lawler, Reporter, Light Reading

lightminded 12/5/2012 | 3:07:49 PM
re: Should Nortel Buy Avaya? OMG, mash up is right. Given Nortel's generally poor record with MA, Cisco couldn't ask for a better scenario. I'm sure "on paper" this looks great! What a novel thought, a troubled foreign tech company merges with a legacy union shop out of NJ. Similar cultures, no overlap in product lines, happy smiling customers and stockholders! Why hasn't anyone else thought of this?
Stevery 12/5/2012 | 3:07:49 PM
re: Should Nortel Buy Avaya? On the plus side, avaya + nortel cultures are a much better phase match than avaya + csco.
madhavia 12/5/2012 | 3:07:47 PM
re: Should Nortel Buy Avaya? Juniper is desperate to get in to the enterprise market. So Juniper should buy Avaya to get into VOIP market and then they can bundle Netscreen security boxes and network switches (if they are ready) as a packaged deal to the customer.

Nortel is a wrong choice because Nortel eventually will loose the market share they gain with this purchase. The reason is they don't have any thing else to bundle with VOIP to sell to the customer. Bundling many features is the main reason why CISCO rules the enterprize market.
donniall 12/5/2012 | 3:07:47 PM
re: Should Nortel Buy Avaya? Norvaya!! Interesting name ....! It does sound a small bit like some medication for Erectile Dysfunction .... Maybe that just about says it all (lol)
Mark Sebastyn 12/5/2012 | 3:07:45 PM
re: Should Nortel Buy Avaya? Wouldn't it make more sense for Nortel to buy Mitel?
High-Tide 12/5/2012 | 3:07:44 PM
re: Should Nortel Buy Avaya? Nortel doesn't need telephony technology from Avaya or Mitel, in my opinion. The obvious benefit in such a deal would be a gain in market share, and perhaps denying a competitor the opportunity.

A more interesting question is why Avaya feels the need to sell itself? They are profitable, and their product line is mature. Analysts have mentioned a possible reason being the variability in earnings - there must be another reason - but it's lost on me. Is paying the ultimate sacrifice justified to deliver shareholder value? Personally, I think not, as there are employees to consider, not to mention customers.

It seems consolidation is bound to occur, sooner or later, but I never expected Avaya to go this route.

HT
litedope 12/5/2012 | 3:07:42 PM
re: Should Nortel Buy Avaya? It might be a NortelGÇÖs call. And if consolidation is the way to go, merging into Nortel might be the safest (if not best) amongst all possible routes.
Pete Baldwin 12/5/2012 | 3:07:42 PM
re: Should Nortel Buy Avaya? Good discussion, everyone.

We've put up a poll asking who ought to buy Avaya. Chime in, be heard:

http://www.lightreading.com/su...

Let's just say Nortel isn't the front-runner.
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