Analysts: Nortel wise to walk away from Avaya

After reportedly entertaining acquisition offers from Nortel Networks, enterprise telephony equipment vendor Avaya today announced an $8.2-billion acquisition by private equity firms TPG Capital and Silver Lake Partners. Some analysts are saying Nortel was right to walk away.

“Even if it were financially possible, an acquisition of Avaya by Nortel would likely have been messy, fraught with integration issues,” RBC Capital Markets analyst Mark Sue wrote in a note today.

The combination of Nortel and Avaya would have created an 800-pound gorilla in the enterprise telephony space: a vendor with about 30% of the market—nearly twice that of its closest rivals, Cisco Systems and Siemens. It also would have more than doubled Nortel’s services business, from more than $2 billion to nearly $5 billion, fulfilling Nortel’s stated goals of growing that segment. But the combination also would have posed significant challenges, UBS Investment Research analyst Nikos Theodosopoulos wrote in note issued today.

UBS imagined $250 million in synergies from a Nortel/Avaya merger over several years, with $50 million to $100 million coming in the first year. Synergies would come mainly from product-related sales, general and administrative expenses but would have been harder to find in product development and supply chain areas, UBS said.

Avaya’s many enterprise customers would require ongoing support without service disruptions, likely forcing Nortel to maintain redundant products for a long time, UBS said. And while Avaya sells most of its gear directly to its customers, Nortel relies much more on resellers, making it harder for the combined company to unify and rationalize its sales channels. Avaya wouldn’t do much for Nortel’s revenue growth, either, UBS said, anticipating nearly 3% growth from Nortel next year and a little more than 4% growth from Avaya.

The deal announced today allows Avaya to solicit competing bids over the next two months, but analysts don’t expect Silver Lake to be outbid since it has already outbid its rivals.

As for Nortel, Sue suggested the company consider acquiring another IP telephony vendor, Mitel. “Across the metrics of synergies, product rationalization, integration and geography, Mitel is a better fit for Nortel than Avaya would have been,” Sue wrote.