Avaya’s Acquisition of Nortel Would Create a North American PBX Powerhouse

| Jul 21, 2009 | Enterprise Technology and Software | Competitive Intelligence Report

| Analyst: Brian Riggs

Current Perspective: Slightly Positive
Vendor Importance: Very High
Market Impact: Very High

Event Summary

July 20, 2009 - Avaya announced that it has signed agreements to purchase Nortel's enterprise solutions business for USD 475 million. The proposed acquisition includes the Nortel Enterprise Solutions voice, data and government systems businesses. The transaction is subject to a competitive bidding process and approval by Nortel’s creditors and the judges overseeing the company’s bankruptcy court procedures. The sale of Nortel’s enterprise assets is expected to be complete in September

Analytical Summary

• Current Perspective: Slightly positive on Avaya’s bid to acquire Nortel’s enterprise division, because it is a step toward clearing up the future direction of the company’s data networking, security appliance, contact center, PBX, unified communications and Government Solutions business. However, it will be more than a month before the bankruptcy court approves the sale to Avaya or any other company that might choose to bid for Nortel’s enterprise group. In the meantime, Nortel, its customers and resellers remain in the same predicament as in the past several quarters, with little insight into the precise future of the enterprise group, its point products or professional services.

• Vendor Importance: Very high to Nortel, because the company needs to move forward with its previously announced plans to spin off its various business divisions. Opening the auction with Avaya’s stalking horse bid starts this process. Very high to Avaya, because the company is in a good position to eliminate one of its largest competitors in the North American market, acquiring its large base of customers and resellers in the same action that will also aid in Avaya’s expansion in other regions of the world.

• Market Impact: Very high on the enterprise market, because the proposed combination of Nortel and Avaya stands to shift the balance of power in the North American PBX market. If Avaya succeeds in its bid, both Nortel and Avaya’s customers can expect significantly different product portfolios to be made available to them in the long term, while resellers can expect substantial changes to their support and compensation programs. In the near term, however, it will be business as usual, with Nortel continuing to drive sales and retain customers, with competitors taking advantage of the continued vulnerabilities of the enterprise division.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

Recommended Competitor Actions

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Recommended User Actions

• Nortel customers should postpone major investments in enterprise systems and software – particularly communications and contact center systems – until it becomes clear which products will be supported long term, which will be discontinued and which will be transitioned to Avaya platforms, if Avaya’s bid is in fact successful. Customers should not expect Nortel and Avaya to be able to provide this information until October 2009 at the very earliest.

• Nortel’s enterprise and SMB communications customers should expect a great deal of attrition in the PBX and contact center product lines should the deal with Avaya go through. Avaya is very unlikely to maintain overlapping product sets in the long term. At the same time, Avaya is purchasing Nortel for a market share grab and will be highly motivated to transition Nortel customers to Avaya platforms as cost-effectively as possible. Businesses that have not already dismissed Avaya as an option for their communications needs should keep an open mind and seriously consider transitioning to Avaya at the appropriate time.

• Nortel’s data networking and security software customers should expect minimal changes to the products they have invested in, as Avaya is likely to remain much of Nortel’s data networking and security portfolio, positioning it as complementary to Avaya’s own communications products.

• Customers that have deployed Nortel’s highly scalable Communication Server 2100 should seek firm a commitment from Avaya on its plans to continue developing and supporting the platform. There is nothing like it in Avaya’s product portfolio, which could mean the system is safe from future rationalization initiatives. However, for the past year or more Avaya has been actively culling products not central to its core markets and, should the Avaya acquisition of Nortel go through, the CS 2100 might not be considered central enough to retain.

• Nortel resellers should demand as much insight as possible into Nortel product rationalization initiatives and technology roadmaps that transition Nortel products to Avaya platforms. Resellers should also carefully monitor Nortel’s channel program to ensure that it retains its traditional strengths relative to Avaya’s.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

Recommended Competitor Actions

| Client access - Full report in Enterprise Communications, Collaboration and Conferencing, Contact Center Solutions, Enterprise Network Systems, Enterprise Security

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