Monday, September 14, 2009

Avaya/Nortel - Traditional Enterprise Telecom Market Moving Toward Disruption

It was announced this morning that Avaya(TPG/SL) has won the stalking horse auction for Nortel's Enterprise division. Avaya made this move mainly for the channel expansion and market-share growth. They will now look to aggressively churn the Nortel base into buying Avaya solutions.
As economy recovers and large enterprise starts buying capital equipment again it’s very feasible that Avaya could easily gross an extra $900M in the course of 12 to 18 months as a result of the acquisition of the Nortel base and Nortel VAR channel partners. This is what smart private equity buyers do. The attempts by Gores Group (Seimens Enterprise Telecom Division owners) to acquire Nortel mean they saw the exact same value prop as TPG/SL.
The $15M set aside as a “retention” fund for Nortel employees likely is really more a “severance” fund. This is a “spoonful of sugar” to be used in softening the blow for Non-US workers who all have severance requirements built into employment contracts via unions and/or non-US govt regs. US-based Nortel workers are going to have a very rough go of it. It’s mostly a non-impact for Avaya workers or a slight positive.
Also in a more strategic sense this suddenly makes Avaya a lot more attractive in relation to a future liquidity event for TPG/SL. Whether they decide to IPO and relaunch Avaya as a public company or sell it, it’s now a more attractive property. Selling it now may be somewhat more complicated because if it was sold to Cisco or another major telecom player now you truly would have a non-competitive market situation from US FTC/DOJ perspective. So the ideal private sale for TPG/SL would be to Microsoft. That would give at least a duopoly of Cisco versus Microsoft in the Enterprise Telecom market. Another possibility would be a sale to a major telecom carrrier like Verizon; notice VZ complained to DOJ about Nortel/Avaya merger.
In a much broader scope, the Enterprise Telecom/UC market is being set up for a disruption by solutions like Google Voice/Wave. Eventually the future version of traditional “Hosted Telecom” that the RBOC carriers deliver(ed) is going to be replaced by something I call “Cloud Telecom”; or more appropriately “Cloud Collaboration”. F500 companies are going away form big corporate campuses with thousands of people at one site toward a very distributed employee model. Employees more and more are scattered around in small offices domestically and overseas and also lots of people working from home/virtually. So big iron CPE boxes at corporate sites become less and less relevant. Instead all that is needed is for an employee to be able to reach those corporate resources at a network connected datacenter via SSL VPN over broadband. So why not then just outsource the datacenter instead of using inhouse datacenter and IT?
That is where an offer like Google Voice, enhanced with perhaps an Avaya CMS call center supporting virtual agents, becomes very attractive on a variable cost (subscription) basis.
This will disrupt both traditional hosted voice AND customer premise telecom businesses as they currently exist. Even very large multisite companies will be able to go fully to Cloud Collaboration, even in the call center. In call center the traditional equipment will hang on for a long time but now in a hosted/subscription model versus as a capital purchase for the enterprise.
However, It’s going to take about 5 years to 7 years for this disruption to happen and before it becomes clear this is coming, TPG/SL will sell Avaya or relaunch Avaya as a public company and get their money back.

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