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Next-Gen Service Provider: December 21, 2009 eNewsletter
December 21, 2009

Avaya's Dance with Nortel

By Brendan B. Read, Senior Contributing Editor

Somehow the Avaya-Nortel enterprise unit marriage, formally announced to the world Dec.18, was meant to be: a union as it were of communications equipment manufacturers from similar lineages: Western Electric/Bell in the U.S. and Bell Telephone in Canada respectively.

The Canadian government had blessed Avaya’s (News - Alert) $915 million deal for Nortel’s Enterprise Solutions division Dec.4, citing the American company’s commitment to keep much of the Canadian unit’s employment intact and to making R&D investments. Avaya finally won the Nortel division’s hand at an auction whose results were announced Sept.14, but to ward off other suitors it ended up paying far more than the $475 million initially agreed to by both companies on July 20.
The government said Nortel’s Belleville and Ottawa, Ontario facilities will become centers of excellence and bases for technology development with Belleville to become a global hardware development and support hub. This move is especially welcome in Belleville [full disclosure; I am a former resident], a small manufacturing city that has been hit hard by the recession-driven crash of the auto industry and by the strong Canadian dollar that led many area nearshore U.S. contact center jobs to leave.
“I have approved the application by Avaya to acquire Nortel’s Enterprise Solutions business because I am satisfied that the investment is likely to be of net benefit to Canada,” Industry Minister Tony Clement said.
There is some irony here. Nortel had originally been founded, reports Wikipedia as a “mechanical department was created within Bell Telephone Company of Canada to manufacture telephones and telephone equipment for Canada due to restrictions on importing telephone equipment from the United States.”
It wasn’t that long ago though, in 2007, when rumors were flying that Nortel, once known as Northern Electric had been a pursuer of Avaya, formerly Lucent and formerly AT&T (News - Alert) Technologies. Instead Avaya went private for $8.2 billion via private equity firms Silver Lake Partners and TPG Capital. Less than two years later Nortel had become the pursued and for rock bottom prices when it filed for creditor protection on Jan.14.
Nortel’s management sold its CDMA/LTE (News - Alert) wireless unit to Ericsson on July 25 for $1.13 billion after much maple-leaf flag-waving from Research in Motion. Four months later, on Nov.25 Ericsson in partnership with Kapsch bought the company’s GSM business for $103 million. The CBC reported that the two firms would split up sales territories between them. Two days earlier, on Nov. 23 the CBC said Ciena purchased Nortel’s Metro Ethernet optical and carrier assets for $769 million.
Nortel’s fate had been sealed a decade earlier though through what can best be described as a “combination of arrogance, incompetence, bad timing and a touch of larceny.” Observers say that had Nortel’s senior management had been a fraction as good and as innovative as its products it would have been the company’s competitors seeking new partners instead.
Once one of Canada’s largest firms, Nortel saw its value fall from $375 billion in September 2000 to less than $4.72 billion in August 2002, a victim of the dot-com blowout coupled by a short but steep economic downturn precipitated by the Sept. 11 attacks. The firm let go two-thirds of its workforce or 60,000 staff and took nearly $16 billion in write downs in 2001 alone.
Then what Wikipedia described as an “unexpected return to profitability” by Nortel caught the eye of auditors. In late October 2003 the firm announced that it intended to restate approximately $900 million of liabilities carried on its previously reported balance sheet as of June 30, 2003, following a comprehensive internal review. Investigators ultimately found about $3 billion in revenue had been booked improperly in 1998, 1999, and 2000.
The Securities and Exchange Commission weighed in, filing civil charges for accounting fraud from 2000 to 2003. Nortel settled the case for $35 million and agreed to report periodically “on remedial measures to improve its financial accounting.”
So will the Avaya-Nortel partnership be a happy one? Would it have been better for both if Cisco (News - Alert) had married one or the other? One will never know because Cisco never made an open move for either company.
This writer and many others wish Avaya and Nortel well. The enterprise marketplace appears to have been sufficiently been battened down for only one major North American company who can successfully and seamlessly migrate existing customers from TDM to IP. There will no doubt be an examination and decisions within Avaya on best of breed solutions for consolidated product lines. The powerful combined Avaya/Nortel R&D teams will busy creating new, attractive, feature-rich, and cost-effective products.
Competitors most notably ShoreTel have made it known though that they will capitalize on this period to market their IP-only solutions, doing away in one deal with both old technology and suppliers. They are homing on what they perceive as nervousness by some Nortel resellers and customers as to the fate of their equipment.
There is some traction to that viewpoint. ShoreTel shares shot up nearly 11 percent Dec.3 reported Reuters after JP Morgan upgraded it to ‘overweight’ from ‘underweight’. Among the factors cited by analyst Steven O'Brien is Nortel’s bankruptcy which “further enhances the potential for market share gains as vendors such as ShoreTel try to attract some Nortel's of existing customers.”
Nick Lippis, who praised the going-private-deal in a June 6, 2007 Network World (News - Alert) story cast doubt on the viability of Nortel buying Avaya, pointing out that there is huge product overlap. He thought that Cisco would have been a better partner for Avaya. He hinted that Cisco would come out as the winner regardless.
“An Avaya-Nortel deal would have been Cisco’s best-case scenario, since it would have taken a year plus for Avaya and Nortel to figure out and implement a rationalization plan, Lippis said. “Cisco would have used that time for winning deals so customers would not have to endure product end-of-life risk and uncertainly.”
“I did think that an Avaya and Cisco combination could work,” he said. “Yes, there is overlap on the IP telephony space, but Cisco is often knocked because it does not have a backward migration offering. Also, Cisco would have picked up a large and loyal customer base, as well as being provided with entry into the high-end contact center market. Perhaps Cisco is not sold on communications-enabled business processes, which is Avaya’s future as it now has the environment to fully develop into a software and services concern.”

Brendan B. Read is TMCnet’s Senior Contributing Editor. To read more of Brendan’s articles, please visit his columnist page.

Edited by Amy Tierney


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