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What is Nortel Enterprise Solutions' Market Value?

There is much speculation that the enterprise business unit of Nortel, currently operating under Chapter 11 bankruptcy regulations, will be acquired by and merged with either Avaya or Siemens Enterprise Communications. Both are currently private companies and owned by private equity firms. It is also possible that another company, IT supplier or private equity, will purchase Nortel Enterprise Solutions (ES), although the betting is on Avaya or Siemens.James O'Neill, former CEO, Siemens Enterprise Communications, was quoted last month in several publications that his company was very interested in ES as it could help Siemens expand distribution channels and play a stronger role in the Federal government market (a source of strength for Nortel for many years). There have been no public statements from Avaya or its owners, Silver Lake Partners and TPG.

Nortel received another extension, to mid-September, for its bankruptcy reorganization plan last month. Should it decide to unload ES in the interim and both Avaya and Siemens are competitively bidding for it, what is ES's market value?

One can determine such a figure by looking at other recent acquisitions of enterprise communications system suppliers: Avaya, Siemens (acquired last year by Gores Group), Inter-Tel (acquired by Mitel Networks), and Ericsson's enterprise unit (acquired by Aastra Technologies). The former two were acquired by private equity firms, the latter by market competitors.

Avaya was purchased for a premium price, $8.2 billion; a price I personally believe was much too high. After deducting cash and cash equivalent assets, the price tag was about 1.5x of Avaya revenues at the time. Fifty one per cent of Siemens' enterprise communications unit was acquired by Gores Group for virtually nothing (no financial funds were exchanged), but there was a plan to invest with Siemens AG approximately 350 million euros to launch new products and fund future acquisitions. Mitel Networks, bidding against Inter-Tel founder Steve Mihaylo, acquired Inter-Tel for $724 million, also about 1.5x revenues after deducting cash and cash equivalent assets. Ericsson was acquired by Aastra Technologies for the bargain price of $102 million, less than one quarter of the enterprise unit's revenues of approximately $450 million.

There were marked business differences between Avaya/Inter-Tel and Siemens/Ericsson at the time of the acquisitions. Avaya and Inter-Tel were doing business as usual and did not require a new owner. In contrast, Siemens AG was actively looking for a buyer for its enterprise communications unit for about two years (it previously merged its network carrier business with Nokia), and Ericsson's interest in its enterprise communications unit was on the decline for many years, because of the corporate focus on its expanding wireless network carrier communications business. Avaya and Inter-Tel were each fully independent operations; the Siemens and Ericsson enterprise operations were business units of multibillion dollar corporations that accounted for a relatively small percent of total corporate revenues.

Looking at ES it appears to belong in the Siemens/Ericsson category, rather than Avaya/Inter-Tel, because of the bankruptcy factor. A fire sale is definitely more likely than a premium purchase price. ES revenues are on the decline and are tracking to be less than $1.5 billion this year based on current financial trends (the recessionary economy is not helping ES nor any of its competitors). Two years ago ES, with revenues exceeding $2 billion, should easily have fetched maybe $3.5 billion, but today Nortel will likely settle for less than half that amount due to changing corporate, economic and market conditions; the continuing rise of Cisco Systems, and the market entry/potential success of Microsoft in replacing traditional system suppliers like ES represents a paradigm shift in the competitive market unseen since the start of the open interconnect era 40 years ago.

Although Nortel's ES business has traditionally been more financially stable than the company's other business units, the time has passed to hope it will receive Avaya or Inter-Tel type of money when the Ericsson multiple (less than one-quarter revenues) is the more likely scenario. A bidding war between Avaya (Silver Lake/TPG) and Siemens (Gores Group) will help elevate the final purchase price, but $1 billion could be the ceiling based on all the factors. Avaya or Siemens would be the largest enterprise communications system competitor based on revenues, installed base, or annual line station shipments by a significant amount if either acquired ES. Siemens may need ES more than Avaya, but either would greatly benefit as it prepares for tomorrow's battles with Cisco Systems and Microsoft.

It is not likely that Nortel will emerge from bankruptcy with all its pieces intact. It should seek to get the most money it can from the sale of its business units to compensate creditors in some way; stockholders can kiss their investment good-bye. Acquiring ES could greatly change the market dynamic, again, if either Avaya or Siemens are the buyers, especially at a bargain price.