Will Avaya's Nortel Acquisition be a Success?

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Will Avaya's Nortel Acquisition be a Success?

Avaya recently completed its acquisition of Nortel's assets and the most important question in the enterprise communications space for 2010 is what happens next. Avaya and Nortel were two of the industry's most dominant players and also fiercely competitive - will oil and water mix well? If so, the new combined entity which encompasses the best people and products from the current Avaya and Nortel has tremendous potential to shake up the market and gain share.

The challenge for many companies making acquisitions is getting the newly combined organization to work well together. Ironically, part of Nortel's downfall came from making acquisitions which were overvalued and not integrating them well.

While I can't speak for the success of the integration of this deal yet, Nortel and Avaya have solid products and top notch engineers. In addition, Avaya always had a more consistent branding and marketing machine so the good news is this will now be applied to the company's combined products.

To learn more I had a call with Todd Abbott, Senior Vice President, Global Sales and Marketing & President, Field Operations and Wes Durow, Vice President of Marketing.

On my call I had a chance to learn more about something I was peripherally aware of - Nortel and Avaya have been working together closely for some time on restructuring and realignment. They now have the organization and roadmap in place and they will formerly announce it to customers on January 19th, 2009.

In the past I have heard from industry contacts that many resellers are concerned about the acquisition and moreover the overlap of dealers could be bad for the entire combined reseller/partner market. Mitel had even told me that many dealers who were selling Avaya had called, looking for alternatives.

I contacted a local Avaya reseller in Norwalk, CT where TMC is headquartered to learn more. I spoke with Pete Harrison President, Custom Phone Inc and he told me his company tends to sell to smaller accounts and he doesn't think the acquisition will affect his practice. Harrison explained that since the market is moving to IP, Cisco is the company to watch. Interestingly the strategy he uses to combat Cisco is to lead with ShoreTel.

This deal has an additional challenge in the form of Avaya's credit rating which was downgraded to junk by Moody's Investors Service. I know what you are thinking... Rich, isn't Moody's one of the rating agencies paid by Wall Street firms to rate investment products which were backed by subprime mortgages. Moreover, I am sure you are wondering if this is the same Moody's which rated much of those investments as AAA and subsequently made buyers comfortable when buying them. Additionally, I am sure you would add, didn't many of these products eventually become near-worthless, threatening a repeat of the Great Depression which cost global governments trillions of dollars to try to correct?

The answer is, this is the same Moody's and to clean up its image and respond to being verbally scolded by government officials the company had a mild personnel shakeup after the crisis began. Having said that, Moody's is obviously being much more cautious now and their comments basically have to do with the size of the Nortel purchase which leaves little excess reserves for Avaya should an unforeseen problem arise.

In a prepared statement Avaya said the company is strong and getting stronger. It goes on to discuss the positive comments made by Moody's which include the potential for this deal to increase the company's market share in the enterprise communications space. It goes on to say that Avaya is weathering the downturn better than most of the competition and now has access to new and lucrative sales and distribution channels.

Abbott mentioned on the call that none of the company's debt comes due until 2014 which tells me that if the industry has a few good years of solid growth then this acquisition could be the deal of the decade. While you can never pin the hopes of an industry on a regional company, Connecticut-based Harrison did tell me that December and January have been great months for his company and 2010 looks like it will be a great year. TMC too is seeing much more optimism from industry players regrarding 2010.

Avaya will continue to focus on unified communications and the contact center and Abbot said, "When you focus on two areas, your odds of being number one are better." The challenge for Avaya is that it now has a solid data business but it is going up against the monster that is Cisco. The company obviously can't become number one in data so it has chosen to deemphasize the unit while ensuring it leverages it as it can. I understand this plan but I also know that as communications continues to become more consumed by packet networks, having a strong data portfolio you can lead with is going to be more and more important.

Acquisitions too are an area Avaya may have to get good at so lets consider Nortel's enterprise assets as practice. Cisco continues to acquire and integrate very well. Every time they do, they can leverage existing relationships in new areas to sell more data and other products. Cisco is not going away and their pace of acquisitions will not slow anytime soon. It will become increasingly difficult for Avaya to compete with this networking giant if it doesn't find a way to gain data marketshare and potentially make acquisitions in spaces such as video, wireless, etc.

Avaya does have an edge though as its parent Silver Lake Partners owns Skype and Abbott told me we will see integration soon. Others at Avaya have expressed frustration in fact that other PBX vendors seem to be leapfrogging Avaya when it comes to a close Skype partnership. We should see more news on this front soon but it seems to me someone at SLP should be sending an email to execs at both companies about speeding this up as soon as the holidays are over.

It remains to be seen what the new product roadmap entails and moreover how well the company does with the acquisition. Any sane person would be thankful to be employed in this job market so one would imagine most former Nortel employees will work day and night to advance the company's cause.

Still, integration is a major challenge and the simple fact is most of these mergers do not work well. Could it be different this time? Yes. Avaya and its investors really need this merger to work and former Nortel employees now employed by Avaya do not want to repeat what happened at Nortel ever again. There are powerful motivators and I wish the new company well.

Most importantly, I hope 2010 is a year with few macroeconomic and geopolitical problems so communications and technology companies can go back to doing what they do best - helping companies become more productive, efficient and profitable.

To all my readers, Happy Holidays and New Year!

TMC's Brendan Read has some important thoughts on the merger and moreover how the tables were turned with Nortel once looking to purchase Avaya.



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