Nortel: Why Avaya

Avaya has had trouble wooing new customers to its all IP line of communications equipment – from straight-up VoIP telephony to unified communications – but buying Nortel’s enterprise business could help alleviate all that, says Zeus Kerravala, an analyst with the Yankee group.

The deal is really all about the customers, he says, and convincing them to migrate their phone systems to Avaya gear over time.
“They’d want to upgrade the legacy and hybrid customers to IP,” he says. “That would be the question. Could they convert the customers fast enough before they go to another vendor?”

Nortel enterprise competitors such as Cisco, Juniper, ProCurve are already swarming around Nortel customers in hopes of luring them away, a job made easier if they perceive that Nortel as a dead-end vendor. That won’t give Avaya much time to act if it does buy the Nortel group, he says. Avaya might also be attracted to the market share boost it would receive from Nortel’s enterprise business. Buying the unit would give Avaya a double digital percentage revenue lead over Cisco in enterprise telephony, according to Dell’Oro Group.Leader Avaya had 16.6% of the $16 billion market in 2008 to runner up Cisco’s 14%, according to Dell’Oro. Nortel came in 4th, with 9.6%, trailing Siemens at 11.4%.

As the Dell’Oro figures indicate, there will be considerable product redundancy in TDM, hybrid and IP PBXes and handsets, and unified communications and contact center applications. Nortel and Avaya have been battling in voice technology for decades from their days long ago as Northern Telecom and AT&T Network Systems/Lucent.

With Avaya’s market share lead, it’s likely that most Avaya equipment would survive a product rationalization.For its part, Avaya won’t comment on whether it has made the bid, reported to be $500 million. That seems a bit steep, Kerravala says, but it may be worth it if Avaya can gain some accounts from it.

“They have not done a great job so far getting new customers,” he says.

So far there has been no mention of Avaya assuming any Nortel debt if it were to make the deal. Similarly there is no mention of Nokia Siemens assuming any Nortel debt if its $650 million bid for Nortel’s CDMA and LTE wireless technology is accepted.

Nortel owes more than $11 billion, and recent estimates put a value on its total assets at just over $2 billion.
For its part Avaya can likely afford Nortel. The company is privately merged with Silver Lake Partners and the Texas Pacific Group, with Silver Lake having $14 billion in managed assets and TCG having $45 billion. Because it is private, Avaya doesn’t have to respond to Wall Street demands for quarterly performance and can think more long-term, the company’s CEO Kevin Kennedy has said.

Kerravala points to Avaya management, which includes many former Cisco executives, Kennedy among them, who were trained on being number one or two in every market they play in or they don’t play. Acquiring Nortel would put Avaya at number one for overall voice sales, he says.

With Nortel networking gear to back up its VoIP software and hardware, Avaya could sell VoIP as a system, more along the model of Cisco, he says. The Nortel enterprise infrastructure gear is pretty vanilla, Kerravala says, but that doesn’t necessarily play against Avaya if it creates VoIP bundles with it.

While the deal could be good for Avaya, it doesn’t seem to hold much direct benefit for current Avaya customers, says one such customer.

Jim Wagner, tech support for Independent Health Association in Williamsville, N.Y., says he can see that the purchase would be help Avaya grow but not necessarily offer him richer options. The health association’s Avaya VoIP system works across a Cisco backbone, so the addition of Nortel networking gear wouldn’t add to the communications features Avaya already provides.
He says he has worked with Nortel gear at other employers’ and says he thinks it is on par with Avaya’s so if there is technology to be shared, it will be good quality.

The main advantage of Avaya buying the Nortel assets would be the customers, which wouldn’t directly improve things for his company or add functionality, Wagner says.

Nortel enterprise equipment includes WLAN, secure routers, wireless access points, phones, firewalls, VPNs, NAC gear, PBXs, key systems, IP call manager. Avaya also has phones and its voice servers as well as a new SIP server that can tie its gear together with SIP gear made by other vendors.

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