After months of speculation and rumor, Avaya appears to be the "winner" in the Nortel Enterprise sweepstakes. Today Avaya announced its intent to purchase the enterprise assets of the beleaguered Nortel for approximately $475 million which is what I had predicted in the blog I posted last month. This is about half of this year's predicted revenue. This may seem high considering the lack of profitability from Nortel but you can bet Avaya will squeeze much of the excess fat off of the Nortel bone and have it be profitable sooner than later.This type of consolidation is good for the industry and has been happening over the past few years with NEC acquiring Sphere, Mitel purchasing InterTel, Ericsson selling its enterprise assets to Aastra, Avaya buying Ubiquty, etc. There are simply too many vendors for this market to support.
About 20 years ago, the voice industry was made up of a handful of companies like Lucent, Nortel, Alcatel and Siemens. Then we entered the VoIP era and added Cisco, 3Com, ShoreTel as well as a bunch of hosted providers that can sell to small businesses. Recently, we entered the "software" era and we introduced Microsoft, IBM, Citrix and perhaps Google down the road. Through these past few transitions we've doubled the number of suppliers of voice services but there isn't double the number of business end users. Couple this with wider adoption of mobile phones and its clear the market needs to rationalize down.
I've used the analogy to the mainframe era when we companies such as Univac and Honeywell started dropping like flies as companies like Microsoft, Intel and Dell grew. IBM was the only "legacy" vendor to make it through that era and we're staring a similar transition in the face. Many years from now, when the dust finally settles, Cisco and Microsoft will have a dominant market position with IBM having a tangential market position focused primarily on the non voice part of the business. I think Avaya has a good shot at being the "IBM" of this market as one of the companies that I expect to make it through the transition and all the others in my mind are up in the air. Alcatel-Lucent, Siemens and NEC have strong foreign home markets that can carry these companies through the transition but its likely their share will decline. One of them may emerge as a strong global provider but no more than one. There are a couple of other smaller, interesting companies such as Mitel who I think is the most attractive acquisition target and Digium that will appeal to the geeky developer community that are likely to have some staying power.
As for the rest, ShoreTel, Panasonic, Toshiba, Aastra, the list goes on the sun is falling fast and they're likely to be rolled into another company or simply go away. This needs to happen for the rest of the industry to be healthy and thrive. Fewer, stronger vendors can innovate and move the industry forward where a bunch of weak, troubled ones cannot. So don't expect Nortel to be the last acquisition we see in this space.
Specifically regarding "Norvaya;" the combined organization will be the undisputed #1 voice vendor. Based on my quick calculations, I believe Avaya and Nortel will be conservatively 25% of the overall voice market (not just VoIP but all voice) with Cisco being #2 with 16%. I'm not sure what that title is actually worth but I'm sure there will be plenty of marketing done around that fact. However, as I did state in my previous blog, Avaya has done an excellent job in converting its own base to VoIP but hasn't been able to attract many new customers. This gives Avaya many new enterprise customers as well as government institutions to sell into. Additionally, Nortel helps Avaya expand its channel by adding some systems integrators and service providers that Avaya does not have right now. So more customers and broader channel, definitely something Avaya would have been challenged to grow organically.
From a product perspective, the combined organization is going to have to go through some consolidation of products on the voice side and decide what to do with data portfolio. Should it choose to keep the data portfolio Avaya would now have an end to end voice and data solution--a systems approach, similar to what the Avaya leadership had when they worked at Cisco. This will cause some tension between Avaya and some of its alliance partners such as Brocade, Extreme and HP so the company will need to navigate that carefully.
For the customers of the two companies, there are benefits to both. For the Nortel customer base there's finally closure to the long period of uncertainty. The product strategy from "Norvaya" won't be substantially different than Nortel alone in that real time communications is core to mission. For the Avaya customer base, the benefits will come down the road when a bigger Avaya is better able to compete and then further re-invest R&D dollars.
The long term determination of whether this was a good deal or not will be based on how many of the channel partners Avaya can retain and how many customers it's able to flip before Cisco, Microsoft and the other companies come knocking with great deals on Nortel replacement products. This is similar to what Bluecoat did when it purchased the CDN business from Network Appliance, but Bluecoat didn't have Cisco and Microsoft nipping at its heels as it was converting customers. I've always said if an acquisition is a good acquisition it's hard to say a company ever paid too much for it and if it's bad, could you pay too little. For example, if Cisco had paid 5x what it did for Celcius it still would have been worth it as it propelled it into the voice world at the right time.
I think the acquisition was the right one for Avaya and I'll give it a thumbs up for now but there's a lot of work to be done executing a long term integration plan.
