Avaya's Future Up for Grabs?By Paula Musich | Posted 05-31-2007
Rumors circled Avaya on May 29 about a possible change of ownership, with Avaya either being taken private by Silver Lake Partners or merging with telecom equipment maker Nortel Networks.
But the impact on customers and the reasons for such moves are not completely clear. Avaya, with a market capitalization of more than $6 billion and no debt, is in fine financial shape for now, most observers believe.
That is likely to change, however, as the whole VOIP (voice over IP) industry shifts from providing IPT (IP telephony) functions based on proprietary hardware to open software foundations. Such a transformation requires a new business model from those vendors and will result in a significant drop in revenue for basic call control functions, according to Jim Burton, co-founder of industry consulting group UC Strategies.
"All the vendors agree the cost of IP telephony will be cut significantly. Siemens [at a recent conference] said call control costs will go down by at least half [and Avaya executives] on the same stage nodded in agreement. That's the challenge they all face," Burton said.
And a new kid on the IPT blockMicrosoft is looking to hasten the cost reductions.
For all the large IPT suppliers that are publicly held, the transition is likely to be very rocky.
"There's fear among enterprise VOIP vendors of the impact of Microsoft [and its entry into the space] and what that does to revenue and market share," said Irwin Lazar, an analyst at Nemertes Research. "We found in the enterprise space there is very little interest in replacing PBXes with Microsoft products or holding off purchases to wait for Microsoft [to deliver reliable IPT software]," said Lazar of a recently published Nemertes survey of Fortune 1000 companies.
As the VOIP vendors change their business models, their revenue streams will change. "There will be dips in earnings and revenues that will be significant enough that people might be alarmed if they don't know what's going on. All these public companies are at high risk of that happening," explained Burton.
The most recent rumor to emerge on May 29 is a potential leveraged buyout of Avaya by private equity firm Silver Lake Partners, according to a Wall Street Journal story.
"There are two reasons for going private: to disassemble the company and sell it in piece parts, or avoid the problems associated with quarterly numbers and put money into the company to grow it," said Frank Dzubeck, president of Communications Network Architects, an industry consulting company. "If you want to have it grow, and put more money into it, you go private and then down the line you re-IPO it," he added.
The first scenario would likely have a negative impact on Avaya's installed base of customers and the latter would be beneficial, according to Zeus Kerravala, an analyst with the Yankee Group. But, he warned, "Private equity firms care about one thingmaking a quick buck."
The rumor that has gotten the most attention, however, is a possible merger between Nortel Networks and Avaya, a move that could create a dominant IPT provider in the crowded field. But that combination would result in a tremendous amount of overlap between these two companies' product offerings, and cast uncertainty as to which product lineNortel or Avaya"will ultimately receive the most future investment and retain its viability," said Mark Cortner, an analyst at The Burton Group.
Another rumored matchup for Avaya is an acquisition by Cisco Systems. The likely attraction for Cisco is Avaya's installed base of customers, its product portfolio and presence in the contact center market and its SOA (service-oriented architecture) software, observers say. But there is also tremendous overlap in VOIP products between Cisco and Avaya and Avaya's legacy hybrid TDM (time-division multiplexing)/IP PBX technology is not in keeping with Cisco's "forward thinking" all-IP-based telephony direction, Cortner said.
Cortner posited an intriguing scenario that didn't make it into the rumors: the combination of "Avaya and Siemens' enterprise telephony businesses into a single, globally competitive company that would potentially greatly improve the positioning of both companies in the marketAvaya with a leading market share in the U.S.A and Siemens with a leading market share in EMEA and Asia," he suggested.
"The whole would be greater than the sum of the parts. The combined company would then be re-launched and the exit strategy for the private investment firm would be IPO," he continued.
Whatever the outcome, the best course of action for any customer using any of the involved vendors' VOIP products is to "understand the [product] road map and how the vendor will evolve into [this new] communication environment," said Jim Burton. "Stick with your current vendor, but make sure he's got a good road map. If he doesn't, then start looking at other vendors," he said.
Still, such road maps could change in the event of a merger. "I think if Avaya was acquired by Nortel, especially with [Nortel's] Microsoft relationship, it would put a lot of questions around Avaya's road map," noted Kerravala.
Avaya and Nortel declined to comment on the rumors.
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