Avaya takeover rumors swirling : Analyst note market conditions right for deal

The enterprise telephony space is ripe for consolidation, a Prudential analyst said in a report last week, and there is plenty of appetite in the industry for a takeover of Avaya Inc.
Nortel Networks Ltd., Cisco Systems Inc. and a private-equity firm are all reported to be interested in a possible deal with the U.S. telecommunications equipment maker. Microsoft Corp., which has a strong relationship with Nortel, has even been mentioned as a potential suitor.
Nonetheless, a deal between Nortel and Avaya would “create the dominant vendor in North America, Europe, Middle East, Africa and South America and a stronger presence in Asia,” Prudential analyst Inder Singh said in the report on the rumored buyout talks.
Similar interests
“They’re all kind of doing the same thing. And often when you have a lot of companies investing in the same thing, you have a market ripe for consolidation,” said Jan Dawson, VP of Ovum’s U.S. enterprise practice.
“Avaya’s king of the smallest of the three companies,” he said. “It’s kind of been struggling to find its way in the world,” but could arguably benefit from some increased market share.
“One interesting option would be for Alcatel-Lucent to acquire them since [Avaya was] spun out of Alcatel to begin with,” he said. Other analysts drew similar conclusions.
“We believe Avaya makes an attractive target due to its large cash balance, solid cash flow and large market presence in enterprise voice,” UBS Analyst Long Jiang said on the heels of the swirling speculation.
“The acquisition of Avaya would be consistent with Nortel’s strategy of increasing focus on enterprise and professional services. Nortel would have a commanding 30% share in enterprise voice and more scale in services. However, Avaya’s 20,000 employees versus Nortel’s 34,000 and the significant product overlap would make such a deal very high in risk given the integration challenges,” UBS Senior Analyst Nikos Theodosopoulos added.
Cisco received less ink from analysts following the rumored talks, but likely could be brought into the fold.
“A combination with Cisco would create the world’s pre-eminent IP telephony vendor, although combinations with either Nortel or Cisco could draw anti-trust scrutiny,” Singh said.
Avaya and Nortel both declined to comment on the reports. Cisco did not immediately respond to requests for comment.
Private equity not expected
“While we believe a private-equity-led buyout is possible, and has been widely speculated on in recent months, it would not address the needed sector consolidation,” Singh added.
All three companies’ stock was up the day the news of the talks broke: Avaya was up nearly 15% to $15.69 while Cisco and Nortel were both up less than 1% in early trading.