Avaya Sees Nortel Deal Helping Private Equity Exit

NEW YORK (Reuters) – The head of network equipment maker Avaya Inc said its purchase of some Nortel Networks Corp (NRTLQ.PK) assets will boost market share and help a potential initial public offering or some other type of exit by its private equity owners.

Avaya, bought by Silver Lake and TPG Capital in 2007, on Friday closed its acquisition of Nortel’s corporate networks unit. It paid $900 million for the business and $15 million for employee retention.

Avaya Chief Executive Kevin Kennedy said the deal would help the company increase sales against competitors, including Cisco Systems Inc (CSCO.O), which have been expanding through acquisitions.

“We believe the company will have greater market share, it’ll be more competitive, and from a multiple perspective, on exit, a greater opportunity for either greater gain or removal of risk,” he told Reuters in an interview.

But Kennedy said the timing of the sponsors’ exit from Avaya, for example through an initial public offering, would largely depend on broader business conditions rather than the company’s own performance.

“Would the sponsors consider that we will be poised earlier for the possibility of an IPO? That may be true,” he said. “But I really think that the efficacy of an IPO depends upon a lot of things that are happening in the industry, less so about what’s happening in the company.”

Nortel, once North America’s biggest maker of telecommunications equipment, filed for bankruptcy protection in January and has been selling off its operations in pieces. It said the enterprise unit’s revenue in the second quarter dropped 28 percent from a year earlier to $465 million.

Kennedy said Nortel’s diverse sales structure would help expand Avaya’s distribution. Around 55 percent of Avaya’s revenue is from its own sales staff. Most other companies in the industry derive over 80 percent through indirect sales, or sales through other partner firms.

While the economy was recovering, Kennedy said, customers still appeared wary of making large-scale investments and are sticking to projects with relatively quick returns.

“They speak as though there will be growth. But they are preparing for sometime during the calendar year for a setback. So they tend to be committing to projects that can be completed within six months rather than 12 to 24 months,” he said.

“We believe that the economy will be some place between flat and up, cautiously up, I’d say,” he said. “But we are also managing the company as though there could be a setback.”

The acquisition comes amid a series of mergers and acquisitions in the network equipment industry.

Large technology companies are trying to expand and act as one-stop shops for customers dealing with increasingly complex data center technologies, while small manufacturers are seeking to secure sales channels in a weak economy.

(Editing by Steve Orlofsky)