Avaya-Nortel Merger: Why It’s Likely to Succeed

by Jeff Wiener on August 20, 2009

Nortel-Avaya logoI’ve just read Eric Krapf’s post titled: Avaya-Nortel Merger, why it’s likely to fail. In it Eric sites many reasons why he believes, as the title suggests, that the MERGER take over between Avaya – Nortel will fail. Although well written, and arguments well presented, I believe Eric is way off base. 3 weeks ago I also questioned the take over, further research has now proven otherwise. Some of Krapf’s reasons include:

KRAPF:
Companies overpaid and have too much leverage–crushed by debt & then the bloodletting begins

THETELECOMBLOG.COM
I suppose the presumption here is that Avaya is going to overpay. Is $475 Million a reasonable offer, or a steal ? I suggest $475 Million is a steal. Although I believe that Avaya will ultimately be forced to pay more then $475 Million, and that Nortel Enterprise will end-up in a bidding war selling for way more then $475 Million (privately I believe it could fetch up to $800 Million), even at that rate, should Avaya decide to purchase, could make their money back in a very short time.

KRAPF:
Poor strategic and tactical planning–once the deal is done, the executives can’t decide what to do next (call it “the Iraq problem”)

THETELECOMBLOG.COM
I’m sure that there are some very smart people (many of whom I have met personally) sitting in a dark smoky room planning and strategizing how they will make this take over succeed. Krapf suggests poor strategic and tactical planning – conjecture really. Nothing backing this claim up !

KRAPF:
Cultural clashes–Geeks-Suits, Europeans-Americans, Data heads-Bell heads

THETELECOMBLOG.COM
Cultural clashes – this is a take over, not a merger. Zafirovski has left the building. BOD has been reduced from 9 to 3.
Geeks-Suits – A year ago maybe. Avaya’s got a new chief in town and he’s doing a fantastic job.

KRAPF:
Strategically ill-conceived–even when the entire industry doesn’t see the value, somehow the buyer knows something everyone else doesn’t

THETELECOMBLOG.COM
The industry does see the value. Nortel’s got some major market share. Customers have been buying that value for a LONG time. Nortel has a LOT of product in the market. Lots of maintenance contracts, government contracts, customers, channel partners … and that revenue will now goto … “principally” AVAYA !

KRAPF:
The buyer forgets it’s really acquiring people
The Avaya-Nortel deal is really about bringing together very talented people quickly (my worry is that many of the really good people may already be gone) to create something unique which offers genuine value to customers looking for communications technologies, services, and support. The deal and its ability to succeed is ultimately about employees, customers, channel partners, and suppliers. It is about making the deal happen with speed, minimal debt, and minimal impact to these key groups of people.

THETELECOMBLOG.COM
Yes, good point Eric. And, as I stated earlier, Avaya has some amazingly talented business folks running the show. Avaya 2009 is not the same as Avaya 2007. Avaya 2007 was a stodgy, slow moving organization. Avaya 2009, post the Silver Lakes, TPG acquisition, has morphed into an entrepreneurial well oiled machine. A year ago I might have been more inclined to agree with you Eric. Not today. When I met Charlie Giancarlo last June, and then Kevin Kennedy in January of this year they both preached the same message. “Avaya WILL become a dealer centric organization within 3 years.” And the changes in the last 6 months have been outstanding. Avaya has made some big commitments in the last year, and they have followed through. And this is a BIG ship to turn around – kudos to Kennedy and his team for what so far seems like a job very well done. Granted, there is still some work to do, but, given what I have witnessed in the last 6 months the NEW Avaya is completely different from the OLD Avaya.

Yes, Avaya has been promising channel changes for the last 8 years. They’re doing it. I see the difference. Digitcom is a channel partner. I just finished a full day’s Channel Summit meeting held at Avaya’s Canadian head office. This isn’t something they would have done a year ago. That’s because this is a NEW AVAYA. Their focus is channels.

KRAPF:
I have an idea of who should–without naming names, I can tell you the profile of the “company” that has the best chance of pulling it off. The acquiring firm needs to be a private equity group with leadership who knows the communications business, has an intimate understanding of Nortel Enterprise, genuinely knows the people side of technology, and can quickly convince customers that it makes good sense to once again buy Nortel products and services.

THETELECOMBLOG.COM
Eric, you just described Avaya !

More:  You can read some more comments on AllAboutNortel.com regarding this post.

More: It seems that I attributed the comments to Eric directly. It appears that they were made anonymously by someone other then Eric. Eric posted them in his blog.

Jeff, www.digitcom.ca

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{ 10 comments… read them below or add one }

George August 21, 2009 at 12:17 am

If AVAYA is buying Nortel Enterprise for ACE then I will sell all AVAYA shares as soon as this deal is done, watch and then short AVAYA at the earliest opportunity. Acquisition is about getting people as well as existing product lines (market shares and revenue). To me, ACE is vaporware (concept is good, but very poor execution) and I have no confident of this R&D leadership team (designer demoralized….is this the fastest and most cost effective way to build an UC team?). However, I do like CS2000 with it’s large customer base (existing revenue, market shares) and it’s leadership and design teams. So, for AVAYA’s future, this deal must be about other products/people.

Jeff Wiener August 21, 2009 at 7:46 am

George – Just as a point of clarification, Avaya is a privately held company and has been since Silver Lakes and TPG took them private in 2007.

Sam R... August 21, 2009 at 10:33 am

Hmmm Georg, I would say its is you does not know what he is talking about else you would know that Nortel’s ACE is not vaporware. Its is designed and tested by highly motivated and skilled people ie the people that have survived 75000 layoffs…the cream of the crop. Also CS2000 is not part of Enterprise its part of Carrier (CVAS)…number one in market share.

tom tucker August 21, 2009 at 1:14 pm

A small part of the Nortel Enterprise package is the Iran Litigation project which has been on-going for over 30 years. This project was passed from PEC to Nortel in 2005. It has nothing to do with the Avaya primary mission, will it be retained or sold to the highest bidder. The U.S. Navy is the primary client?

insider August 21, 2009 at 2:10 pm

ACE is vaporware? No confidence in the R&D leadership team? Designers demoralized? Clearly ‘George’ is clueless – when I joined the ACE development team it was like leaving Nortel for a small, aggressive startup. Our R&D management is the best I’ve worked for. And the only thing demoralizing this team is having our product referred to as “vaporware”. Whoever ends up with Nortel Enterprise not only gets a great product with ACE, but a highly productive, experienced, motivated and agile design team as well.

JC August 21, 2009 at 5:10 pm

Anybody ever stop to think that 1+1 doesn’t always equal 2?

Especially when you talk about Executives. You can’t have 2 VP’s of Sales, you can’t have 2 CTO’s, when you merge two companies you are going to keep one and fire/demote the other.

That means that you have a management structure that only understands half of the business.

Or worse, you keep both and have a company that competes against each other.

Either way, you lose…..

NEXsplor August 22, 2009 at 12:52 am

I read the “why it won’t work” piece before reading this one. I have to share that I fully agree with your positions here. I was part of Nortel with a high level function within the channels and have had many conversations with the new brass at Avaya. I DO think the price will go up, I do think that ultimately The Gores Group will attempt to out bid Silverlake / TPG, but the better fit is Avaya. The folks at Nortel are hoping the Gores pulls it out because of the smaller overlap in North America, but the best impact for the end users would be Avaya. The products mix and match better, the cultures are more alike, channel strategy (at least now it is with Avaya) is very similar and they will benefit instantly from access to a data portfolio. The broader question in the UC space is what is going to happen with Microsoft comes out with wave 14 (next year) of thier OCS (unified communications) offering. Thereby eliminating the need for a PBX or 3rd party gateways altogether. It eventually becomes a 2 horse race between Cisco and Microsoft anyways. If Gores doesn’t get Nortel, they become irrelevant almost immediately. If Avaya gets them there is a chance with proper execution they can do well. That said, my money is still on the Cisco / Microsoft battle. I think the herd of CPE voice players will thin quickly in the next 36 months.

Jeff Wiener August 22, 2009 at 6:50 am

@NEXsplor: Thanks for the comments. I do agree with you on most fronts, except the Microsoft / Cisco CPE point. Microsoft’s voice solution hasn’t managed to capture the corporate market as many expected it would. It seems that they are floundering, especially with their SMB Response Point plans. Cisco has been, and will continue to be a contender although they also have a lot of work to do in the SMB space. 36 months is a long time, and I expect to see more Cisco, and less Microsoft.

Simon Harris August 26, 2009 at 2:13 pm

Nortel has been uncompetetive vs Avaya and Cisco for a while. In EMEA where I spent most of my career (long time with Avaya and sligthly less with Alcatel) I never found Nortel to be the really serious competitor in most serious tenders. On the other hand, Avaya needed to stop being so schizophrenic about their channel strategy. It looks like they are preparing to do that and move to a truly indirect model. If thats the case then this would make sense. Acquiring reseller and customer base should help to get a more sure footing in place. This all makes alot of sense to me as far is it goes. My only question would be profitability and the long term value add. A big part of the success of Avaya product came from the services provided around the core product. Avaya’s service organisation was key to this. However much of the Avaya services revenue came from direct accounts. This seems to leave a gap, revenue provides the resources to drive services capability. In the current climate not many organisations can take revenue to invest in longer term gains. So if Avaya move to a truly indirect model and the direct service revenue tails off how are they going to replace the services with revenue generating value add services which dont simply amount to a tax on partners, effectively driving away the potential new partner base obtained during the acquisition.?

Gus Henderson January 20, 2010 at 7:24 pm

Aspect has superior Voice over IP contact servers and solutions and will be taking mad customers from Avaya-Nortel over the next few years. Book it.

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