The Avaya Buyout: Why�and whither?

Opinion: The VoIP giant appears to be at the top of its game. Why sell now?

By Ted Stevenson | Posted Jun 11, 2007
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The acquisition of a high-profile company like Avaya is going to raise eyebrows and pique a certain amount of interest under any circumstances, but mergers are uncommon for companies that, like Avaya, are highly profitable. One has to wonder—and perhaps speculate—about the motives and strategy both of the acquirers and the acquirees in this deal.

We spoke recently with industry insider and sometime VoIPplanet.com source Dan Hoffman, CEO of New York City-based outsourced VoIP services providers M5 Networks and exchanged some thoughts on the situation.

While Hoffman sees Avaya "at the top of their game," he also sees the company as prescient enough to realize it's reached an inflection point at which it really has to reinvent itself or, ultimately, die. To do that, "they need to step out of the public spotlight," Hoffman observed . . . "and to command some more resources."

"The deal validates some of the big trends we're seeing," Hoffman added.

"First, voice is more important than ever"—voice and a number of related communications technologies that are rapidly becoming clustered around voice. "This is quite good for everyone—including Avaya; so in a sense, it's a peak for the market," he said.

At the same time, the market landscape is undergoing a sea change. The low-hanging fruit of large enterprise VoIP conversions—a key market target for Avaya—has largely been stripped away. New investment money, new ideas, new startups are moving in a different direction, and the rate of change is picking up, Hoffman thinks.

The second trend Hoffman notes is that, increasingly, "voice is software. The big symptom here is that you're getting these traditional software competitors jumping in," he pointed out, citing Microsoft in particular. "We've been reading about Microsoft voice every day. Also jumping into the game is the open-source community -- another major player in software."

The third trend is one that Hoffman is intimately acquainted with: "Software is now being delivered as a service," is how he put it, simply.

So, Hoffman suggested, it's quite possible that Avaya higher-ups see the company's situation something along these lines: 'Wow! We're the leader in enterprise voice! And voice is more important than ever. That's great! But we come out of the old-school box world and we need to become a software company—possibly even a software-as-a-service company. We gotta get out of the public spotlight and we need some deep pockets."

Why "out of the public spotlight"?

In part because a successful public company is, in a sense, held hostage by its success in the marketplace. "Your management team is spending all their time managing the stock, managing compliance. There's a huge layer of cost," Hoffman pointed out—and little maneuvering room. "Chrysler is another company that needs to transform itself or die," he said. "They have to do something, and it's just too hard to do it in the public markets today."

We probed about the possibility that Silver Lake and TPG Capital (the acquiring private equity firms), rather than providing the cover and resources necessary for this sort of self-reinvention, simply intend to break up Avaya and sell off the parts to extract maximum value—or some other scheme that would not favor either customer or stockholder interests.

"That's a big question," he conceded, adding, however, that there's some evidence of other synergies in the works.

"Silver Lake has bought two other companies I'm very familiar with in the last few months," Hoffman told VoIPplanet One of these is IPC Information Systems, a firm that specializes in communications systems for the banking and trading industries. "They make 'turrets,' you know those phones that look like the console of a 747 that traders use?" The other, WestCom Corporation, Hoffman describes as "a private line company for financial services—a dedicated telco, basically—with great telco infrastructure."

"IPC has made significant inroads into not only the banking and brokerage business, but also into the public safety and emergency services areas, military and government security applications—places where you have really high-end, mission-critical voice functionality. Avaya would fit in there," Hoffman conjectured—staying in a big-player milieu, which is familiar territory.

Alternatively, "they have to figure out a way to go down-market, because the enterprise is saturated, and 60 to 80 percent of job growth is in the mid market—that's where all the phones are getting sold," Hoffman pointed out. And Avaya has the assets to do it: excellent phones, great IP technology, the ability to deliver features and functionality that businesses require, with a high degree of reliability.

"If they could leverage that into the new-world model," Hoffman speculated—"which is to say that it's got to be much more flexible, with faster product cycle and a channel that gives service in a different way," Avaya could have another life in the mid market.

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