Avaya To Go Private In $8.2B Deal; Partners Relieved


Avaya ended a week of speculation when it unveiled plans to go private via an $8.2 billion merger agreement with investment firms Silver Lake and TPG Capital.

The cash deal, announced late Monday night, was foreshadowed by reports that Avaya was entertaining several interested suitors, including the two private equity firms as well as networking competitors Nortel Networks and Cisco Systems. The sale is expected to close this fall.

In an e-mail letter to Avaya employees that was viewed by CRN, Avaya President and CEO Louis D'Ambrosio said the deal will provide "compelling returns" to Avaya shareholders and "clear value" to employees and customers.

"Going private creates an environment for Avaya and its employees to accelerate the execution of our strategy," D'Ambrosio said in the letter.

He also reassured employees that the company's top priorities remain intact.

"We are playing to win. While this is a big step, most things will not change for our company. We are more confident than ever that our three priorities -- strategy, execution and culture -- are right on target," he said.

Financial analysts viewed Avaya as an attractive takeover target because of its strong market share in the hot VoIP market and its small size relative to other players in the space, such as Cisco.

For fiscal 2006, Basking Ridge, N.J.-based Avaya reported earnings of $201 million on revenue of $5.15 billion. Earlier in the week, the company said it has shipped more than 100,000 of its SMB-focused IP Office VoIP systems, serving an estimated 3.6 million users.

Several Avaya solution providers expressed a sigh of relief that private equity firms, not rivals Cisco or Nortel, have emerged as Avaya's buyer.

"This is the best of all worlds for them to be bought by [private equity firms]. If they had been purchased by existing vendors in the IP telephony space like Nortel or Cisco, there would be too much overlap and a lot of the Avaya pieces and parts would most likely disappear," said Chris Labatt-Simon, president and CEO of D&D Consulting, an Avaya partner in Albany, N.Y. "All of the investment we've made in Avaya would have gone away, and that's a big thing. We've invested a lot of money in the partnership."

Still, Labatt-Simon is taking a wait-and-see approach on what the deal will mean in the long term for Avaya and its channel. "I have no idea if it's a good thing or a bad thing. But immediately, it's business as-is," he said.

Neal Stanton, president and CEO of New York-based Avaya partner Consultedge, said he's optimistic that the private equity firms will cultivate growth for Avaya's business.

"I hope they see that they have a strong company with a good product set, streamline it, but take advantage of what's there and help grow it," Stanton said. "Silver Lake has a phenomenal reputation for buying, investing, building and creating value," he added.

Silver Lake Co-Founder and Managing Director David Roux said in a statement that his company's interests are aligned with the long-term interests of Avaya customers and employees.

"We have full confidence in Avaya's excellent management to build on the company's remarkable technology and history, which spans more than a century, to deploy advanced IP communications solutions as a source of competitive advantage for customers," Roux said.

NEXT: Where's Microsoft?
Some partners ahead of the deal said Avaya had a few weaknesses that an outside investment could help shore up.

"From the Avaya side, the biggest Achilles heel is its lack of a data infrastructure play. Their [strategy has been] to partner with best-of-breed players, but long-term I don't see that working when Cisco is out there bidding on everything but the kitchen sink," said Jeff Hiebert, CEO of ROI Networks, an Avaya partner in San Juan Capistrano, Calif. "You've got to have the building blocks and money behind you. Avaya alone doesn't have enough capital."

Hiebert also questioned whether Avaya could keep up with the sizable investments its peers are making in technology research and development.

One suitor that solution providers said was noticeably absent from the Avaya acquisition rumors was Microsoft, which is making its own play for a chunk of the IP communications space via upcoming product launches and a partnership with Nortel. That left some partners to wonder if Microsoft plans to step in later and snap up the Avaya assets after it goes private.

The door has been seemingly left open for Microsoft or another potential buyer to step in and scuttle the deal with Silver Lake/TPG before it closes, since the merger agreement provides for Avaya to solicit proposals from third parties through July 24. Avaya would be assessed an $80 million fee for terminating the merger agreement in favor of a better offer or $250 million if the deal falls through for other reasons, according to filings with the Securities and Exchange Commission.

Under the terms of the agreement, Avaya shareholders will receive $17.50 in cash for each share of Avaya common stock.

The move represents the latest large-scale private equity investment in the technology sector. CDW last week unveiled plans to be acquired by Madison Dearborn Partners for $7.3 billion.

The Avaya deal is also the latest sign of upheaval in the VoIP market. In addition to Microsoft's entrance into the space, Mitel Networks is in the process of acquiring Inter-Tel in a $732 million deal unveiled in April, and ShoreTel is planning to go public later this year.