When a US$8.2 billion deal to take Avaya Inc. private is finalized in the fall, the telecommunications manufacturer will be able to bring new IP-based products to market faster than before, according to the company’s chief operating officer.
“In a private environment we can make some moves a bit more aggressively to make the company nimbler, faster and quicker on the strategies we already have in place,” chief operating officer Mike Thurk said last week.
These are “moves that are harder to execute in a public environment with quarter-to- quarter pressures.”
He made the comments in an interview in Toronto, where he was a keynote speaker at the Canadian Telecom Summit, an industry conference.
After several days of rumours that the company was negotiating with Nortel Networks and private equity companies, publicly traded Avaya announced last week that it has struck a deal to be bought by U.S. investment firms Silver Lake and TGP Capital.
The deal amounts to a 33 per cent premium over Avaya’s average share price for the preceding month. It’s still subject to board and regulatory approvals, which means that Avaya hasn’t talked to its potential new owners about many details, Thurk said.
However, he told the conference “their view is completely aligned with the strategic direction of the company . . . We don’t expect any change in our product strategy our management team or our focus.”
Still, among the advantages of going private is the ability to “make some longer-term bets in the short term,” he said in the interview.
For example, he said, Avaya could decide to spend heavily on bringing a product line to market earlier than scheduled, spending that might be harder to do for a publicly traded company trying to maximize profits.
Avaya, spun off from parent Lucent Technologies in 2000, focuses on selling to mid-to-large-sized organizations, pulling in about US$5 billion a year in revenue.
In April it reported second quarter net income of US$57 million, compared to US$38 million in the same period in 2006.
Sales of products were up eight per cent year over year, including a 15 per cent increase in sales of converged voice applications.
Industry analysts have received the acquisition warmly. In a research note Gartner pointed out it will let Avaya restructure away from public scrutiny as buyers move away from stand-alone TDM systems – which the company’s history is based on – and towards telephony embedded in enterprise applications.
Among the steps the company could make are streamlining products and increasing the profitability of services, it speculated.
Elizabeth Herrell of Forrester Research wrote in a report that Avaya will have the opportunity to find new sources of revenue by putting more emphasis on product innovation.
But she also pointed out that it may also have to cut costs dramatically if it can’t grow revenue.
Thurk, however, dismissed speculation of cuts as “premature,” saying no talks on that subject had been held so far with the new owners.
“In a private environment I’m sure there will be areas we look to double down in, and areas we look to reduce,” he said, but Silver Lake and TPG were not buying a financially struggling company.
Yankee Group telecommunications analyst Zeus Kerravala said in an interview that one challenge Avaya faces is that a large chunk of its revenue comes from sales and servicing TDM equipment.
The company has to get existing customers to shift to IP-based solutions, he said, without disrupting revenue.
More than half of the company’s revenue comes from services, and two-thirds of that relates to legacy gear, he said.
But Thurk said only one-third of Avaya revenues comes from services. More than 75 per cent of its sales to its installed base are IP telephony products, he added.
Among the company’s advantages, he said, is that its product strategy allows customers to shift to IP at their own pace.
As for the just completed US$131 million acquisition of Britain’s Ubiquity Software Corp., Thurk said it was an “incredibly strategic acquisition.”
Ubiquity makes SIP-based communications software for fixed and mobile communications service providers, systems integrators and independent software vendors. As a result it gains an enterprise platform on which developers can write vertical applications for Avaya’s products, he said.
Although there had been reports that Avaya had been talking to bigger but financially-troubled Nortel about a merger, Yankee Group’s Kerravala doesn’t think it would have worked. For one thing, he said, the companies have overlapping products.
A number of telecommunications makers who have to shake off years of TDM products and customers are pondering merging, but Kerravala doesn’t think that’s the road to go.
“What this market needs is consolidation through Darwinism,” he said. “Let the weaker companies die.”
