IHS Global Insight Perspective | |
Significance | Avaya has won the bidding for Nortel's Enterprise Solutions business, but paid nearly twice the bidding floor after competing bids from at least one company. |
Implications | Verizon has objected to the deal as a result of apparent refusals to service specific equipment placed in government agencies. Avaya has already reportedly reversed that position. |
Outlook | Subject to regulatory approval, including potential investigation into antitrust issues, the deal is expected to close before the end of the year. |
Nortel has announced that Avaya has won the bidding for its global Enterprise Solutions business, as well as all outstanding shares for Nortel Government Solutions Inc. and software development house Diamondware. Avaya has agreed to pay US$900 million, together with a pool of US$15 million set aside for an employee retention programme—nearly double the US$475-million bidding floor set in a stalking horse agreement between Nortel and Avaya (see World: 21 July 2009: Nortel Signs US$475-mil. Stalking Horse Agreement with Avaya for Enterprise Unit). The Globe and Mail reports that Siemens Enterprise and its private equity partner, the Gores Group, was the other bidder in the auction, which pushed up the final price paid by Avaya. The deal will transfer the majority of Nortel employees over to the new business, although reports state that a minimum of 75% will be retained.
Nortel reiterated, "The company does not expect that its common shareholders or the preferred shareholders of Nortel Networks Ltd will receive any value from the creditor protection proceedings and expects that the proceedings will result in the cancellation of these equity interests."
Kevin Kennedy, the president and chief executive of Avaya, noted, "Our successful bid brings us closer to adding Nortel and its complementary channel, portfolio, research and development, and global presence to Avaya … We believe the acquisition brings inherent value to both organisations' customers, employees and partners, and we look forward to its successful conclusion."
Outlook and Implications
The deal is still subject to court approval in the United States, Canada, France and Israel, with the Globe and Mail reporting that this is expected by the end of today (15 September). Regulatory approvals are also required, which could include an antitrust investigation by the U.S. Department of Justice that may lead to some assets being shed.
Verizon has already objected to the potential sale, submitting a court filing that Avaya had refused to take on maintenance contracts for equipment bought from Nortel and used by almost all agencies in the U.S. government (see United States: 11 September 2009: Verizon Objects to Avaya Bid for Nortel Enterprise Unit). The president of Nortel Enterprise Solutions, Joel Hackney, dismissed the filing, saying, "We do not expect the Verizon interaction and the news around that to any way impact the court approval of this deal nor the close of this deal." In August 2009, the Wall Street Journal reported that Nortel may set up a new entity solely to service existing equipment, which may be one solution (see World: 11 August 2009: Revenues Fall 25% Y/Y as Nortel Releases "Final" Results; to Auction LG Unit Mid-August). However, Verizon is likely to be angling to gain commitments through the regulatory approval process that Avaya would provide full equipment replacements and services. Bloomberg reports that Lynn Newman, a spokeswoman for Avaya, has stated that they already plan to fulfil the contract at the centre of the complaint. Joel Hackney expects the deal to finalise and close in December 2009.
Avaya and Nortel
Avaya was created as a spin-off of Lucent Technologies (itself formerly a part of AT&T) in 2000. It has been a privately held company since being acquired in 2007 by affiliates of private equity houses Silver Lake and TPG Partners for US$8.3 billion, and generated revenues of US$5.28 billion in fiscal 2007. Avaya claims to take the number one position in its key markets of contact centres, telephony systems, enterprise messaging, unified communications and audio conferencing, competing mainly with Cisco Systems and Siemens Enterprise.
Nortel generated revenues of US$2.4 billion from the Enterprise Solutions business in 2008. The Nortel acquisition will consolidate Avaya's presence in the North American market—to a degree that the antitrust investigation may find worthy of intervention, although Cisco Systems is also strong in the domestic U.S. enterprise equipment market. Avaya also gains strength with the U.S. Federal Government market through the ownership of the independent Nortel Government Solutions unit. With Avaya being a U.S.-based company, the national security requirements that mandated that structure should disappear and facilitate integration of the government solutions business.
The remaining businesses under the Nortel umbrella now include the interest in the LG-Nortel joint venture, which has been reported as up for auction, and the Metro Ethernet business. The latter was the first unit touted for sale and reports such as by InformationWeek and the Canadian Press indicate that bids for the unit—potentially the most valuable—are in the process of being submitted.