Analysts weigh in on US$8.2B Avaya acquisition

The US$8.2-billion acquisition of Avaya Inc. might allow the telecommunications services provider to redirect its energy toward offering more software-based integrated solutions, said an analyst.

The company announced the merger agreement Tuesday with private equity firms Silver Lake, which targets technology-driven growth industries, and TPG Capital, focused on media and telecommunications, industrials, technology and health care.

It’s a good move for Avaya, given new competition and the changing face of the telecommunications industry, said Elizabeth Herrell, analyst with Cambridge, Mass.-based Forrester Research Inc.

“Being just a telecom provider alone is not going to help companies really be competitive in the future,” said Herrell.

She said Avaya will have to start offering integrated unified communications suites that combine communications applications with collaboration technologies.

“The telecom business of the future is not just a business telephone on your desk, it’s the ability to communicate anywhere on any device – a PC, a mobile, a cell phone – in a virtual environment,” said Herrell.

She said Avaya knows that – and if that’s what Silver Lake and TPG Capital want, then the infusion of private equity into the company can help it achieve this vision.

According to Bern Elliot, analyst with Stamford, Conn.-based Gartner Inc., the acquisition will continue to exert pressure on companies that have yet to come to grips with the evolution of communications. “It’s another example of the effect of VoIP and consolidation and the shift of communications from standalone solutions to broad communication suites,” he said.

Avaya is a prime candidate for acquisition, according to Herrell, given its “good installed base and lucrative business.”

Albert Daoust, senior analyst with Mississauga, Ont.-based Partner Research Corp. thinks the acquisition itself is purely “a financial event,” with “neutral” impact on Avaya’s business agenda.

In recent years, Avaya has acquired several companies including VPNet, Quintus, Routescience, Nimcat Networks, Spectel, and Traverse Networks. It’s also expanded in Asia and Europe.

The transaction, which will likely be completed this fall, represents a definite trend in the telecommunications space where private equity firms are moving in and privatizing companies, said Herrell.

However, competitors in this space shouldn’t be threatened by the change in Avaya’s position, she added. “They’ll see this as maybe Avaya changing its market position by being a private company.”

The acquisition is also due to changing perceptions around technology stocks, said Daoust, which had “fallen out of fashion” following the bust in early 2000s.

“In the last couple of months, people are trying to make a go at Bell, and now Avaya,” said Daoust. “People are now seeing there is value again in the technologies [from a financial point of view].”

He said to get used to such acquisitions of “old well-established quality companies” in the telecommunications space, as more will follow.

Avaya sought the interest of other large competitors, including Nortel, said Herrell. However, she doesn’t view a merger with Nortel as particularly favourable because it would only result in more consolidation. “They would gain revenue and market share, but I’m not sure they would gain innovation,” said Herrell.

Elliot agreed. “They have very parallel portfolios, and would have had to decide which ones to continue and which not to. And the end result would have been a lot of unhappy customers.”

This way, he added, Avaya can move ahead without losing customers to competitors.

Avaya said existing customers should expect no changes to services and products post acquisition. “There will be no disruption in the way we serve our customers,” the company said in an e-mail.

According to Daoust, the current merger agreement presents a “lower risk” transaction. “Avaya will simply be operating as before, but instead of shares being traded, they’ll be owned by these two private equity companies.”

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