Speculation swirls around Nortel, Avaya

Nortel Networks is among the companies in talks with Avaya about a possible acquisition, according to the Wall Street Journal.

The vendor of Internet protocol gear for enterprise communications met with Nortel earlier this month about a possible deal, the Journal said. Though the two couldn’t agree on a price or whether the deal should be cash- or stock-based, they are still talking, and a deal could still result.

Avaya is also meeting with private equity firms about potential acquisitions, the Journal said.

Further fueling speculation of an imminent deal is the fact that Avaya postponed its May 31 analyst meetings and hasn’t yet rescheduled them.

Nortel’s efforts in the enterprise space have swelled in recent months, marked by a major alliance with Microsoft for unified communications products that puts Nortel increasingly in competition with Cisco Systems.

"A combination [of Avaya] with Nortel would create the dominant vendor in North America, [Europe, the Middle East and Africa] and South America, and a stronger presence in Asia," Prudential analyst Inder Singh wrote in a note referring to today’s reports.

The resulting company would hold about 30% of the enterprise voice market--more than double that of Cisco or Siemens, UBS Investment Research analysts said in a note issued this morning. However, integration challenges would make such a merger "very high in risk," UBS said, because there would be a great deal of product overlap and because, with roughly 20,000 employees, Avaya's workforce is already nearly 60% the size of Nortel's.

Avaya has a market capitalization of more than $6 billion. It reported $220 million in net income on more than $5 billion in revenue for its 2006 fiscal year, which ended last September.