CA: Acquisition would create a North American PBX Powerhouse
Current Analysis Article: Summary
Event Summary
July 20, 2009 - Avaya announced that it has signed agreements to purchase Nortel's enterprise solutions business for USD 475 million. The proposed acquisition includes the Nortel Enterprise Solutions voice, data and government systems businesses. The transaction is subject to a competitive bidding process and approval by Nortel's creditors and the judges overseeing the company's bankruptcy court procedures. The sale of Nortel's enterprise assets is expected to be complete in September.
Analytical Summary
• Current Perspective: Slightly positive on Avaya's bid to acquire Nortel's enterprise division, because it is a step toward clearing up the future direction of the company's data networking, security appliance, contact center, PBX, unified communications and Government Solutions business. However, it will be more than a month before the bankruptcy court approves the sale to Avaya or any other company that might choose to bid for Nortel's enterprise group. In the meantime, Nortel, its customers and resellers remain in the same predicament as in the past several quarters, with little insight into the precise future of the enterprise group, its point products or professional services.
• Vendor Importance: Very high to Nortel, because the company needs to move forward with its previously announced plans to spin off its various business divisions. Opening the auction with Avaya's stalking horse bid starts this process. Very high to Avaya, because the company is in a good position to eliminate one of its largest competitors in the North American market, acquiring its large base of customers and resellers in the same action that will also aid in Avaya's expansion in other regions of the world.
• Market Impact: Very high on the enterprise market, because the proposed combination of Nortel and Avaya stands to shift the balance of power in the North American PBX market. If Avaya succeeds in its bid, both Nortel and Avaya's customers can expect significantly different product portfolios to be made available to them in the long term, while resellers can expect substantial changes to their support and compensation programs. In the near term, however, it will be business as usual, with Nortel continuing to drive sales and retain customers, with competitors taking advantage of the continued vulnerabilities of the enterprise division.
Target Markets
Small to Medium Enterprises, Large Enterprises, Global 2000, ILECs, Global Carriers, Resellers/Channels, Systems Integrators, IT Implementers, Third Party Implementer
Perspective
Current Perspective
We are taking a slightly positive stance on Avaya's bid to purchase Nortel's enterprise group. The move triggers an auction process that should see Nortel's enterprise assets transferred to the winning bidder by end of September 2009. Though it remains unclear at this time if Avaya will in fact be awarded Nortel's enterprise group, there is at least a light at the end of the proverbial tunnel for Nortel employees, customers, resellers and business partners who to date have had no insight into the future direction of the enterprise division. In the meantime, however, Nortel will remain vulnerable to competitors that will continue to prey on its customers and resellers with targeted sales programs. And if Avaya successfully acquires Nortel's enterprise group in September, a long and potentially painful integration of the companies, their product portfolios, services organizations and reseller programs should be expected.
In January 2009 Nortel filed for Chapter 11 bankruptcy protection in the U.S., followed by similar filings in Canada, EMEA and elsewhere. Initially the company planned to reorganize itself and emerge as a lean, mean telecom machine. (Please see Nortel Bankruptcy Filing Casts Doubt on Future Path – The Enterprise Networks Perspective, January 15, 2009). However, a worsening economic climate, reduced sales in certain Nortel divisions and geographic regions, and other factors conspired against the company and the new plan was to sell off its various divisions, starting with its carrier unit. (Please see Nortel Announces Sale of Carrier Networks Business Unit; Portends Wider Asset Sale, June 22, 2009). Nortel has now entered into an agreement with Avaya for the sale of substantially all of its enterprise division, including its data switching, security appliance, contact center, PBX and unified communications products, as well as a share of Nortel Government Solutions. Under the terms of the agreement, Avaya is a “stalking horse” bidder, offering $475 million for Nortel's enterprise assets and most of the intellectual property. By early August, rules will have been set up that allow additional bids to be made, with the bankruptcy court awarding the enterprise group to the winning bidder by the middle of September 2009.
For Nortel, Avaya's bid is a lifeline of sorts. Regardless of whether or not Avaya actually emerges as the winning bidder, its offer to purchase the enterprise group is a star that Nortel employees, customers and partners can steer by as they navigate the murky waters of the bankruptcy court proceedings and Nortel's subsequent plans to sell off its various business divisions. Until now it has been entirely unclear when Nortel would be able to provide insight into what the future has in store for its enterprise products and solutions. Though far from final until the auction process is concluded, Nortel can at least now say that the new owner of its enterprise group will be known in the fall. If Avaya succeeds in its bid – and at this time there is no reason to think it will not – the company will eliminate one of its largest rivals, acquire a huge installed base of customers, have direct relationships with some of the most effective channel partners in the enterprise market, and have access to a data networking and data security portfolio entirely lacking from the Avaya product line. This last point would allow Avaya to finally present itself as a single source of voice network and communications gear in a way that Cisco, Nortel, Alcatel-Lucent, 3Com and (most recently) Siemens-Enterasys have been able to do.
As mentioned, however, until the bidding process is concluded, Nortel's enterprise group remains in an extremely vulnerable position. Competitors will continue to poach its customers, woo its business partners and do their best to spread fear, uncertainty and doubt about the future of Nortel's enterprise products regardless of whether two months from now they are owned by Nortel itself, Avaya or some other entity. This will continue even after the auction of Nortel's enterprise assets, since there will be a months-long process needed to integrate Nortel's enterprise assets into Avaya or whoever the winning bidder turns out to be. There could be significant defections as Nortel products are rationalized or if Nortel's channel program is changed in a way that irks its current resellers. If Avaya does in fact emerge as the winner, there will be a significant amount of overlap in the companies' small business, SMB and enterprise voice systems, as well as their messaging, conferencing, unified communications and contact center portfolios. Rationalizing products and creating roadmaps that will migrate discontinued products will be a complicated process that could drag on for months, if not years. Moreover, Avaya has no experience in merging a company of this size into its own operations. With mergers of this magnitude difficult to orchestrate in the best of conditions, Avaya will have its work cut out for it for some time to come.
Positives and Concerns
Competitive Positives
• Avaya's offer to purchase Nortel's enterprise business begins to clarify what will happen to Nortel's networking, communications, security and contact center assets. It should be clear by mid-September whether Avaya will in fact be the winning bidder, with regulatory and other approvals due 30 to 90 days later. This provides Nortel customers, resellers and partners with greater insight into what is expected to happen to Nortel's enterprise business and in what time frame. This is more information than has been available to them to date and will help Nortel customers and resellers build more concrete plans on their investments and certifications in Nortel technology.
• If Avaya wins its bid for Nortel, Avaya will acquire all of Nortel's enterprise products, customers, channel relationships and employees, as well as all intellectual property that does not overlap with patents owned in part by Nortel's optical or carrier divisions. This will effectively eliminate one of Avaya's largest and longest standing rivals in the communications market. It will also give Avaya a market-leading position in the enterprise PBX market, allowing it to regain the lead from Cisco in terms of PBX line shipments.
• Avaya's acquisition of Nortel would provide it access to a data networking portfolio, as well as data security and outbound call center products currently lacking from the Avaya portfolio. Avaya would also acquire Communication Server 2100, Multimedia Communication Server 5100, and oversight of the SIPxchange open source PBX community that Nortel has managed since its acquisition of Pingtel. Whichever of these survive the product rationalization process that would certainly follow an Avaya acquisition of Nortel, surviving products would provide Avaya with a broader portfolio, as well as some competitively differentiating technology.
• Avaya has long struggled to build a reseller program that does not overly conflict with its own direct sales initiatives, whereas Nortel has had a much more harmonious relationship with its resellers. Avaya could become a considerably more channel-friendly company if it implements a Nortel-like reseller program company-wide. In addition, Avaya has long lacked relationships with service providers as strong as those of Nortel. Though there are Tier 1 channels in common, in acquiring Nortel Avaya would also gain access to a wider range of service providers that have long resold Nortel communications gear, providing a ready channel for Avaya products as well.
• Nortel has spent the past few years building out its services organization, in particular infusing it with Microsoft expertise centered around Microsoft Office Communications Server 2007. Avaya, whose services organization is larger and more mature than Nortel's, could add some Microsoft-centric services that would directly benefit its customers.
Competitive Concerns
• Avaya and Nortel have entered into a “stalking horse” agreement. This means that the deal is by no means done. It remains uncertain whether the judges overseeing Nortel's bankruptcy court proceedings will award Nortel's enterprise business to a rival bidder. As a result, the future of Nortel's enterprise remains in a state of considerable uncertainty and will remain so through September and (assuming Avaya wins the bid) into the following months as business and product lines are integrated. This could be an ongoing source of frustration to Nortel customers and partners who have long been uncertain about the future of their investments in Nortel technology and training.
• Successfully integrating Nortel's enterprise group into Avaya's business operations will be a colossal undertaking. Avaya has no experience with an acquisition of this size, and will have to devote considerable resources – in terms of money, personnel and time – to accomplish it. Moreover, Avaya is presently in a state of considerable change, with layoffs, executive- and director-level turnover, product line rationalizations and significant changes to its channel program. Acquiring Nortel, eliminating overlapping products, services and personnel, merging a very different channel strategy into its own, and adjusting technology partnerships will only add to Avaya's still-evolving position.
• There is a considerable amount of overlap between Avaya and Nortel's SMB PBX, enterprise PBX, unified communications and contact center products. If the companies were to combine, there would have to be a sizable number of point products eliminated or rationalized through integration. This would need to be done in such a way as it does not cause an exodus of the Nortel customers and resellers Avaya has been so keen to acquire.
• An acquisition of Nortel would introduce data networking products into the Avaya portfolio, allowing it to deliver a well-rounded converged communications solution. However, it is applications, not voice-data convergence, that characterizes the most significant advances in business communications market at present and there is little in the Nortel portfolio that will significantly move the Avaya forward in the area of communications application development or integration. Put a little differently, there is little in that Nortel brings to the table that would help Avaya compete more effectively specifically with either Microsoft or Cisco, which remain its primary competitors in the communications market.
• A combined Avaya-Nortel would need to reassess many of its business partnerships with other technology firms. If Avaya keeps the enterprise network systems as part of Nortel, the combined company they would then be in competition with Avaya's existing infrastructure partners. Those partners will seriously have to consider whether to move to another voice partner or work with a competitor. Avaya and Nortel have had very different relationships with and attitudes toward Microsoft, Extreme, HP and others, all of which would need to be reevaluated and their combined solutions portfolio changed accordingly.
Recommended Actions
Recommended Vendor Actions
• Nortel needs to complete the bidding process and stabilize the operations of its enterprise group as quickly as possible. Customers and channel partners have been incredibly forgiving, standing by Nortel throughout its bankruptcy protection process. However, Nortel's enterprise customers and resellers need clear guidance as to the future of their investments in Nortel technology and this will only be possible after Nortel's enterprise group finds a new home.
• Nortel needs to do everything possible to retain its enterprise customers, resellers and business partners. Nortel's customer base is among its most valuable assets and will be a significant factor in its ability to sell its enterprise division.
• Avaya and Nortel need to work out detailed product roadmaps so these can be presented to Nortel customers as soon as possible after the acquisition is concluded. Nortel customers and resellers need to know which communications and contact center products will stay, which will go, which will be transitioned to Avaya platforms and how such a transformation will take place. With there being so much overlap in the enterprise PBX, SMB PBX, unified communications and contact center portfolios, customers will want guidance on how to transition their Avaya and Nortel products to those that will remain in the portfolio.
• If Avaya chooses to retain Nortel's data networking and security portfolios, it will need to reevaluate its relationships with Nortel's data networking competitors such as Extreme, Juniper and HP completely. If Avaya retains Nortel's data networking and security portfolio, it should do so quickly and with minimal fanfare as Avaya continues to dedicate the majority of its resources to product initiatives around unified communication, services oriented architecture and the sort of multivendor systems and software integration facilitated by its Aura platform.
• If Avaya's bid is successful, Avaya should abandon the Nortel-Microsoft Innovative Communications Alliance (ICA). The ICA has led to some interesting product integration work, but in the enterprise communications space Microsoft should be treated more as a competitor than a technology and business partner. Integration work between Microsoft software platforms will of course need to continue, but the closeness of the ICA need not be maintained to do this.
• Because both Nortel's ACE and Avaya's Aura platforms make extensive use of open APIs and service oriented architecture (SOA) development practices such as Web service enablement, Avaya should seek to merge these two platforms as quickly as possible. Doing so will be necessary, as there is overlap in terms of functionality. However, because they are used to integrate UC and collaboration products from their respective companies, a merged ACE/Aura solution can forge points of interoperability and create a management framework covering IP communications equipment from both vendors. (For more on Aura, see Avaya Aura Casts Enterprise Communications in a New Light, April 1, 2009. For more on ACE, see Nortel Updates ACE for Broader Appeal Among Microsoft, IBM, Cisco and Avaya Customers, June 12, 2009).
Recommended Competitor Actions
• Nortel and the courts will finalize the rules for bidding on its enterprise unit by the first week of August. Other companies interested in bidding against Avaya will need to do so in either August or early September. More specifically, Siemens Enterprise should consider bidding for Nortel's enterprise division since it would provide the company with a significantly better position in North America. If Siemens Enterprise decides not to bid for Nortel's enterprise business unit, the company needs to devise new ways of expanding its market share in North America.
• ShoreTel, Mitel, NEC Unified Solutions, Aastra and other competitors in the North American PBX market should continue targeting Nortel customers and resellers, trying to win them over to their own solutions. Nortel will remain very vulnerable for the next several months, with SMB and enterprise customers more willing than ever to explore alternative technologies.
• Aastra, Alcatel-Lucent and other competitors in the European PBX market should likewise try to capitalize on Nortel's continued weakness and targeted sales programs. However, European PBX developers should not expect Avaya's acquisition of Nortel to improve either company's role in the region significantly. If anything, corporate integration initiatives is likely to prove an ongoing distraction that European PBX developers can take advantage of in the short term.
• Cisco, as the only other vendor invested in creating a UC and collaboration infrastructure similar to Avaya Aura and Nortel ACE, must step up its efforts with Service-Oriented Network Architecture (SONA), matching Avaya's level of marketing, R&D and partner outreach. Though still in its infancy, Aura has attracted support from IBM, which has extended its alliance with Avaya to create a comprehensive intrusion protection package for Avaya.
Recommended End User / Customer Actions
• Nortel customers should postpone major investments in enterprise systems and software – particularly communications and contact center systems – until it becomes clear which products will be supported long term, which will be discontinued and which will be transitioned to Avaya platforms, if Avaya's bid is in fact successful. Customers should not expect Nortel and Avaya to be able to provide this information until October 2009 at the very earliest.
• Nortel's enterprise and SMB communications customers should expect a great deal of attrition in the PBX and contact center product lines should the deal with Avaya go through. Avaya is very unlikely to maintain overlapping product sets in the long term. At the same time, Avaya is purchasing Nortel for a market share grab and will be highly motivated to transition Nortel customers to Avaya platforms as cost-effectively as possible. Businesses that have not already dismissed Avaya as an option for their communications needs should keep an open mind and seriously consider transitioning to Avaya at the appropriate time.
• Nortel's data networking and security software customers should expect minimal changes to the products they have invested in, as Avaya is likely to remain much of Nortel's data networking and security portfolio, positioning it as complementary to Avaya's own communications products.
• Customers that have deployed Nortel's highly scalable Communication Server 2100 should seek firm a commitment from Avaya on its plans to continue developing and supporting the platform. There is nothing like it in Avaya's product portfolio, which could mean the system is safe from future rationalization initiatives. However, for the past year or more Avaya has been actively culling products not central to its core markets and, should the Avaya acquisition of Nortel go through, the CS 2100 might not be considered central enough to retain.
• Nortel resellers should demand as much insight as possible into Nortel product rationalization initiatives and technology roadmaps that transition Nortel products to Avaya platforms. Resellers should also carefully monitor Nortel's channel program to ensure that it retains its traditional strengths relative to Avaya's.
