Tiny Genband swallows Nortel’s giant VoIP business

After no other qualified bidders came to the table, Genband has won Nortel’s VoIP assets for its stalking horse bid of $282 million. The deal, which will likely close in the second quarter, makes Genband one of the largest carrier VoIP equipment providers in the world, combining its gateway assets with Nortel’s softswitching platforms. It also spells the end of Nortel as independent company. The Carrier VoIP and Application Solutions business was the last of Nortel’s many pieces to be parceled out among the industry.

“Basically this combines a number one gateway company with a number one softswitch company to make the number one company in VoIP,” said Mehmet Balos, executive vice president and chief marketing officer at Genband. “I think this will create the most complete carrier switching portfolio in the industry.”

Balos said that synergies will be immense. The combined CVAS and Genband will have equipment in two-thirds of the top 100 operator networks, move Genband’s business much deeper into the voice network and will better position the company in the IP multimedia subsystem (IMS) sector. The deal also could fundamentally shift how Genband attacks the market. Today, Genband addresses the market in a two-tiered approach, selling its gateways directly to Tier II and Tier III operators like Leap Wireless (NASDAQ:LEAP) , MetroPCS (NYSE:PCS), and Frontier Communications (NYSE:FTR), while the other half of its sales go through its channel partners Ericsson (NASDAQ:ERIC), Nokia Siemens Networks (NYSE:NOK, NYSE:SI) and Alcatel-Lucent (NYSE:ALU), which resell Genband’s gateways to many of the world’s largest operators.

Nortel as a Tier 1 end-to-end equipment provider sold directly to Tier 1 operators—in fact, it resold Genband’s G2 and G6 small and medium gateways to smaller operators. And while the other “ends” of that end-to-end business went to vendors like Ericsson, Ciena and Hitachi, Nortel still has incumbent relationships with dozens of the world’s largest service providers. Genband will inherit those customers, though Balos said Genband change its business model overnight. Genband prefers to go through its channel partners, and while its direct contact with Tier 1 operators may grow as result of the CVAS acquisition, it will continue to focus on its OEM relationships to sell its gateways. Genband will also offer Nortel’s softswitches to its channel partners, but many of them already offer competing products, so Genband will likely continue Nortel’s direct touch strategy on that switching front. Nortel’s global footprint also allows Genband to expand its direct sales from its focus in North America to the rest of the world, Balos said.

Genband will more quintuple its size through the acquisition, merging CVAS’s 2200 employees with its own 400. Balos said that there will be some job cuts to reduce overlap between the two businesses, but he doesn’t expect them to amount to more 300 positions. Genband’s headquarters in Dallas with grow from 200 employees to 400, and Genband will keep much of CVAS’s global operations and North American R&D intact. On the product side there is little overlap. Genband’s gateway and Nortel’s softswitch portfolio complement each other well, while what duplication there is in each other’s portfolios is primarily in legacy product lines that were bound for retirement in the next few years anyway, Balos said. Genband will make those product rationalization decisions in the next few months as it closes the deal as well as hold discussions with CVAS’s senior management.

In the third quarter—CVAS’s last financial reporting period—it had $210 million in sales as it continued to gain contracts despite Nortel’s bankruptcy. It scored a hosted enterprise solutions and fixed mobile convergence contract with Telefonica (NYSE:TEF) and network transformation contract with Telekom Austria. At an interview at Mobile World Congress CVAS president Samih Elhage said Nortel had even managed to grow its market share in Q3 to 16%, far ahead of its nearest competitor.

Elhage said that CVAS didn’t just sit on its market share and aging portfolio; it continued to invest in R&D and recently released its next-generation softswitching platform, built on the advanced telecom computing architecture (ATCA). Much of CVAS progress in the last year was in the wireless space, where carriers have begun implement VoIP either offloaded on to WiFi or other wireline networks or directly over the wide area radio access network. CVAS is supplying the softswitches and application platforms for a major North American VoIP over WiMAX deployment, Samih said, though he declined to the name the operator.

The acquired CVAS softswitch business finds Genband competing with some new rivals, including VoIP, softswitch and IMS players like Sonus Networks, Metaswitch and BroadSoft – as well as larger network equipment providers who at times come down market to compete for certain VoIP/IMS opportunities.

Genband is working on similar lines, exploring the huge potential for VoIP in wireless as operators explore offloading voice traffic via femtocells and WiFi and examine their voice options for their future all-IP long-term evolution (LTE) networks. Genband has been moving far beyond its bread-and-butter trunking gateway business to attack the FMC space and session border controllers sectors. In fact, Genband’s strategy appears to be carving a large niche for itself as a VoIP applications specialist across all markets and standards. It has even been expanding to the capabilities of its next-generation S9 and G9 gateways to include policy control and deep packet inspection.

Nortel said that it had several interested parties in the CVAS business but, except for Genband, none submitted a qualified bid. Genband $282 million bid will be adjusted for Nortel’s debt, making the purchase price somewhere around $180 million. In total, Genband expects to spend around $400 million to close deal and restructure operations, Balos said.