If the reports of Avaya’s acquisition are accurate, Texas Pacific Group and Silver Lake Partners are near to closing the largest leveraged buyout of a computer networking company.
Avaya, TPG and Silver Lake are declining to comment on the reports, but according to the New York Times, the two private equity firms will pay about US$8 billion for the company, or $17 per share — a 5.7 percent premium over Avaya’s close on Friday.
The bidding for the telecom equipment provider was intense, according to a Wall Street Journal report, which cited an acquisition price of $7.7 billion. Nortel and Cisco, which have also been eager to acquire their competitor, apparently have been shut out.
Consolidation an Unusual Goal
An acquisition by Cisco or Nortel never seemed very likely to Yankee Group program manager Ken Landoline.
“It is unusual for a high tech company to merge with another just for market consolidation,” he told CRM Buyer, adding thatthe acquisition might have made more sense for a large software company with deep pockets that was seeking a foothold in the VoIP, or Voice over Internet Protocol, market.
“If it turns out to be true that private equity acquired Avaya, then it will be indicative of its success to date, how well it has been run and what the growth path looks like for the next two years,” Landoline noted.
Indeed, Avaya has attracted a number of suitors for its sound financial fundamentals: namely a $6 billion cash flow and low debt levels.
Evolving Growth Patterns
This stable financial picture is likely to shift as the tech industry continues to evolve, Bernard Golden, CEO of Navica, told CRM Buyer.
“The Avaya deal is part of an increasing trend that we will see much more of in the next couple of years,” he said.
An inevitable shakeout in the telecom industry is set to move it into a new stage of technology and economics, Golden said, comparing it to the shift in the software industry from packaged software to Software as a Service and open source.
“As profitability comes less and less from growth, it must come from reducing the cost of operations,” he said.
Large customers and those firms using the flagship products of the company are most likely to weather the shift in ownership with little impact, Golden continued.
“If you are an important part of the company’s revenue stream, you’ll probably get increased attention, since keeping you happy is important to keep the revenues flowing in that underpin the deal,” he added. “If you are using the best-established products of the company, you’re probably going to get by OK, since those products represent the majority of revenues for the company, and keeping them flowing is critical.”
Firms that are using marginal products from the company may be out of luck, though.
“One of the things these deals always call for is paring down the product portfolio to reduce expenses; if you’re using one of those products, you can quickly find yourself stranded,” Golden said.
Also in doubt are the emerging — but potentially very profitable — product lines Avaya has begun to develop in recent years. For example, the company is attempting to leverage its voice portal and IP communications platform for additional uses beyond the contact center and corporate office. The communications collaboration space has been one such target, with the introduction earlier this year of Communications Enabled Business Processes.
This software-and-service combo offering embeds Avaya Intelligent Communications products into a business process — such as a production line’s crisis communications and decision-making process — in order to automate human collaboration as much as possible.