How Private Equity Is Reshaping Unified Communications

We know it’s true in politics: There’s the news, and there’s what goes on behind the news. Perhaps the same can be said of Internet telephony—at least in selected cases.

Take for instance the recent news that Skype would be deepening its ties with telephone company Avaya in a push to offer unified communications. The two companies say the enhanced relationship will benefit customers on both sides and it probably will.

But what goes on behind the scenes? How did this warming come about? For it certainly seems an unlikely pairing: Avaya is the ultimate enterprise telephony vendor; Skype, until recently, entirely a consumer play.

It helps to consider the common thread: Both Skype and Avaya are properties of the tech-centric private equity investor Silver Lake Partners.

“Silver Lake is saying: There must be some synergies we can squeeze out of this,” VoIP industry analyst Jon Arnold of J. Arnold and Associates told Enterprise VoIPplanet.

While it is unclear from the outside just how active a role Silver Lake plays in forging a meaningful relationship between its properties, “I’m sure they have a pretty active hand in this,” Arnold said.

(Silver Lake did not return calls for this story.)

Silver Lake purchased the majority share of Avaya in 2007 for $8.2 billion. In 2009 Silver Lake bought the majority share of Skype for $1.9 billion, with eBay holding the remaining shares.

Other recent acquisitions by Silver Lake include Mercury Payment Systems, Spreadtrum Semiconductors, and Vantage Data Centers Data Center, all in 2010.

Silver Lake clearly has an interest in seeing two of its biggest holdings, Skype and Avaya, thrive. Today, in light of warming relations, it seems the strategy is to drive that success by bringing the companies’ technology offerings closer together.

In the near future, the partnership between Skype and Avaya will bring interoperability between Avaya’s capabilities and Skype telephony solution Skype Connect. By the second half of 2011, company executives say, Avaya will be supporting all of Skype’s services including voice, video, IM, and presence.

While calls will work across both systems, the interoperability should be invisible to the user, a seamless integration of capabilities that would strengthen both offerings.

Analysts say shared parent Silver Lake would have good reason for encouraging this growing closeness, given what one might see as a natural fit between the two companies’ business models. While Skype has been moving toward the business user as a possible audience, it still caters primarily to individual users. Avaya on the other hand addresses the enterprise environment. By sharing resources the two could cover a wide swath of the telephony marketplace, generating added value on both sides.

Some speculate Silver Lake might be moving toward a merger of the two companies at some point down the road, to further take advantage of this synergistic scenario. “If they were to merge them you would have a formidable force,” said Alan Weckel, senior analyst with Dell’Oro Group.

Even without a merge, the mere fact of a cooperative approach to the market could yield strong results, especially for Skype. Largely a free service, Skype will need to find a way to bring in some cash over time, and a partnership with pay-to-play Avaya could open that door. “They know they have to get access to better revenue streams,” Arnold said.

From an investor’s point of view there is a real chance here to leverage some long-term return on its investments. But there also are challenges facing Silver Lake, as it tries to encourage these siblings to play nicely together.

“The culture of Skype is still fairly independent, it’s not a totally corporate thing like Avaya,” Arnold said. “Trying to make these companies work together is not as easy as it looks.”

More clear is Silver Lake’s long-term strategy, industry analysts say. Almost certainly the plan is to eventually take the siblings public.

Weckel points to the example of Avago. Silver Lake purchased the company (then known as Agilent’s Semiconductor Products Group) in 2005 for $2.66 billion, renamed it Avago and eventually took it to a successful 2009 public offering.

Given that track record, Silver Lake undoubtedly is looking for an IPO for its two prize holdings, Weckel said. But it probably won’t happen until their cooperative relationship has deepened and solidified.

“Will it happen? Absolutely,” Weckel said. “But it’s not something they would tend to rush. They are patient.”

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