Avaya Is Set to Go Private

Avaya has answered acquisition rumors by going on the path to becoming a private company. The telecom giant revealed on Monday that it is getting scooped up by private equity firms Silver Lake and TPG Capital for a price tag of about $8.2 billion, or $17.50 per common share. The transaction, expected to be completed in the fall, is subject to shareholder and regulatory approval. Avaya’s board of directors has already approved the deal and recommended that the company’s shareholders move to adopt the agreement.

It should be noted that the agreement allows Avaya to solicit proposals from third parties during the next 50 days and (subject to agreement terms) respond to unsolicited proposals at any time. However, according to Avaya, there can be no assurance that this will result in an alternative transaction, and it does not intend to disclose developments regarding the solicitation process unless and until its board of directors has made a decision.

"After an extensive review of Avaya’s strategic alternatives with Avaya management and our financial advisors, the board of directors of Avaya determined that this transaction with Silver Lake and TPG provides the best value for Avaya’s shareholders," said Phil Odeen, nonexecutive chairman of Avaya’s board of directors, in a written statement.

Japan Telecom, ON Semiconductor, SunGard, and the pending acquisition of Alltel are a handful of TPG Capital’s significant telecom and technology investments, while Silver Lake’s portfolio currently includes outfits like Gartner, NASDAQ, SunGard Data Systems (owned jointly with TPG), and Thomson. Silver Lake was among the firms rumored to be interested in acquiring Avaya, as were Avaya rivals Nortel Networks and Cisco Systems.

Sheila McGee-Smith, president and principal analyst of McGee-Smith Analytics, says that as an industry analyst she is disappointed that Avaya found a financial buyer as opposed to a strategic one. "The nature of the telephony software market is changing," she says. "We expect over the next few years to see a different category of acquisitions happen, similar to the acquisition of Telephony@Work by Oracle or the acquisition of Tellme Networks by Microsoft. These are more industry-changing events. Clearly Avaya is much bigger [than those acquired companies] but over time [those kinds of deals are] going to be the direction of change." She adds, though, "by not being acquired by Nortel, Avaya can remain as a strong alternative to Cisco."

David Molony, principal analyst at Ovum, says that the deal is a vote of confidence in Avaya and the IP telephony business because private equity typically is looking for businesses with reliable cash flows it thinks can be improved quickly and substantially. "Until now, telecom equipment vendors had been left to sort out their own financial futures," he said in a written statement. "Avaya is different in that it is not encumbered by the need to fund infrastructure businesses. Nonetheless, it may still have missed out on the drive to consolidation and partnership."

Molony adds that Nortel and Cisco, arguably Avaya’s two main rivals in IP telephony and unified communications (UC) systems, have both agreed to develop new services on the back of Microsoft's Office Communications Server. "Avaya may have had a chance to join them, but apparently chose not to. Instead it has its own expanded UC project in development," he said. "Whether that can be brought to market independently is really a question now for the new owners to consider."