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Siemens, MP File Objections to Avaya/Nortel Bid

Although many recent articles have been written based on the assumption that Avaya will be the winning bidder for Nortel ES, Nortel Government Solutions, and DiamondWare Ltd., based on Avaya's "stalking horse" status, it appears that the bidding process will not go uncontested. Gores Group and Germany's Siemens AG, the co-owners of Siemens Enterprise Communications, said on Wednesday it is pushing to submit its own bid to acquire Nortel ES through a venture called Enterprise Networks Holdings (ENH). ENH has said that it is spending considerable resources, time and expense in the expectation of making a competing bid for the assets, and has filed a limited objection to the proposed bidding procedures for the Nortel unit in the U.S. Bankruptcy Court for the District of Delaware.ENH said the bidding procedures have several provisions that not only give Avaya an unfair advantage, but also reduce the likelihood that Nortel's stakeholders will receive maximum value for the assets. The court has been asked to require that Nortel provide each qualified bidder all information about the assets being sold. ENH has also asked Nortel to provide to qualified bidders all documents related to Avaya's bid for the assets, along with any documents relating to competing proposals for the assets.

MatlinPatterson Global Advisers LLC (MP) also had a filing with the bankruptcy court handling the Nortel matter that said Avaya's offer has an antitrust "out," or clause, that allows Avaya to walk away from the deal if regulators require it to shed assets to avoid having too much market power. MP, who also submitted a losing bid for Nortel's LTE wireless assets (tentatively won by Ericsson with a bid of $1.13 billion), said the Avaya offer has no "hell-or-high-water" provision that requires the buyer to do everything possible to make sure the deal closes. According to the MP filing, if Avaya wins Nortel's enterprise solutions business at a bankruptcy court auction, it can take as long as seven months to line up regulatory approvals and close the deal without breaching its agreement. Nortel will not be able to look for other buyers or entertain other offers for the business during this period. MP has a lot at stake regarding the Nortel bankruptcy, because it owns $400 million of Nortel's nearly $4.2 billion debt. MP has said that it wanted to keep Nortel intact, but that is unlikely to happen in consideration of the ongoing asset sell-offs.

The fate of Nortel ES is currently up in the air. If Avaya, as the "stalking horse," loses the bidding process it will get a break fee estimated at about $14 million plus some legal expenses. Gores/Siemens and MP can be joined in the bidding process by others before the auction deadline sometime in September. Cisco would derive a major benefit from the potential acquisition by significantly increasing its market share and installed customer base of voice communications systems at the expense of its major competitor Avaya; Cisco and Nortel already share many major dealers, especially in the North American market. Alcatel-Lucent would greatly expand its presence in North America, a geographic market in which it has not been able to establish a strong foothold for its voice communications offerings during the past decade; Alcatel-Lucent is currently the shipment leader for voice systems outside of North America. Other potential bidders could be HP, who may feel the need to enter the voice communications market to protect its other IT enterprise operations against encroachment by suppliers such as Cisco Systems. Additional efforts could be led by other private equity firms who may see Nortel ES as a profitable investment at the right price.