Avaya may be ready to change hands again in order to take advantage of the market momentum that the $27.5 billion sale of Alltel has created. Avaya formerly the Business Communications unit of Lucent Technologies (now part of Alcatel-Lucent), a spin-off of AT&T, which Lucent spun-off in 2000. Much of Avaya’s product and customer set today can be traced back to its AT&T legacy where it formed part of AT&T Network Systems. Since its separation from Lucent, Avaya has sold its manufacturing and connectivity divisions to focus on its current product line-up as well as pursing expansion in Europe and Asia through acquisitions.
Potential suitors include Nortel, Cisco, and private equity firms. A Nortel deal may be hindered by its current financial state. An acquisition of this size does not generally fit the Cisco model. Avaya’s financial picture appears to make a prime candidate for a private equity purchase. Reuters indicates that Silver Lake Partners may be a potential buyer. Avaya is currently debt-free and has improving market capitalization. The WSJ estimates that about 50% of Avaya’s revenue comes from long-term service contracts.
Business drivers. Prudential estimates Avaya’s share in IP telephony is approximately 21 percent and Avaya holds patents and equipment used to migrate traditional phone and data systems to integrated Internet protocol-based networks.
Analysis. Private equity firms have been known to borrow investments funds to complete these purchases and try to recover their costs by reducing the size of the firm or dismantling it to sell off the parts of the firm in order to repay the large amounts of debt borrowed. The intermediate phase of reduction (firing and layoffs) is where most existing Avaya customers will feel the pain. Now would be a great time to review existing contract expiration dates and out clauses.
Watch where Avaya is headed.
Links
http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=a.TeXdqAIERE
http://www.reuters.com/article/idUSN2929711720070529?pageNumber=1
http://news.zdnet.com/2100-1035_22-6187018.html
http://en.wikipedia.org/wiki/Avaya
