Avaya/Nortel deal could get blocked by U.S. feds

The U.S. government could still block Nortel Networks Corp.’s agreement to sell its enterprise business to Avaya Inc., but probably won’t, a Canadian analyst suggested.

Avaya has an out clause if they don’t meet the regulatory requirements,” said Ronald Gruia, Toronto-based program leader for emerging telecoms at research firm Frost & Sullivan. “They could walk away from the deal.”

Toronto-based Nortel announced Monday Avaya Inc. of Basking Ridge, N.J. has agreed to buy Nortel’s enterprise business for US$915 million. Nortel, which has been operating under bankruptcy protection since January, is planning to sell off most of its assets.

In July it agreed to sell its carrier wireless unit to LM Ericsson of Sweden. That deal has been approved by bankruptcy courts but may be subject to a review from Industry Canada.

The Liberals have asked Prime Minister Stephen Harper to ensure the government reviews the agreement to sell the wireless business to Ericsson. The Liberals did not ask the government to actually block that sale.

“Our position (on the Avaya agreement) is identical to the position we took with respect to the wireless,” said Marc Garneau, Liberal Member of Parliament for the Montreal riding of Westmount Ville-Marie, who also serves as his party’s industry critic. “This was a transaction valued at US$900 million,” Garneau said. “Therefore it needs to be reviewed under the Investment Canada Act.”

The ICA requires Industry Canada to review all foreign acquisitions valued at more than $312 million. Nortel officials expect bankruptcy courts to approve the deal Tuesday. But Gruia noted the U.S. Justice Department’s Anti-Trust division still has to review it.

“The key issue is the DoJ rubber stamp,” Gruia said, adding the regulator would examine the market power a combined Avaya-Nortel company would have, compared to other major vendors such as San Jose, Calif.-based Cisco Systems Inc.

“If you look at it from a high level, if you combine the (small and mid-sized) products with enterprise, and you look at North America … chances are the DoJ would approve, he said. “But if you start slicing and dicing the market, if you look at large enterprises only, Avaya, nortel and Cisco together would have a much bigger chunk if the overall market.”

Gruia said Avaya and Nortel would have more than 42 per cent of the market if you account only for the contact centre products.

“If they start slicing and dicing, it may force Avaya to dispose of the Nortel Symposium products,” he said, referring to the Nortel server and associated products designed to route phone calls and messaging in corporate call centres.

Lynn Newman, Avaya’s media relations director, said “it is too early to discuss the portfolio” of products. Avaya first announced its intent to acquired Nortel’s enterprise assets in July, when it placed a “stalking horse” bid of US$475 million.

That bid resulted in an auction Friday. Nortel would not say who else placed bids but published reports have claimed New York-based MatlinPatterson and Munich-based Siemens Enterprise Communications also participated in the auction.

Nortel’s enterprise product portfolio, which was built up in part through its acquisition of Bay Networks in 1998 for US$9 billion, includes phones, PBXs, firewalls, Ethernet routing switches, virtual private networking, network access control, key systems, voice switches and media gateways.

Although Avaya stopped making switches and routers a long time ago, Gruia has said there would be some redundancies between Nortel and Avaya’s telephony products. Avaya needs to be careful in any decisions to stop making or supporting any product, he added.

“They will have to look at product roadmaps managing product end of life will be very very important,” he said. “They have to convert customers seamlessly.”

The head of a Canadian company that resells Nortel products said his customers are relieved.

“There definitely will be some that that will be dropped, but not immediately by any stretch,” said Rob Finucan, chief executive officer of Combat Networks Inc., an Ottawa-based integrator. “My guess is there will be a support plan put in place by Avaya over a three to five year time frame.”

He added his customers using Nortel equipment are no longer concerned about the future of the company.

Most of them are pretty happy that it is Avaya,” he said. “They see Avaya as North American company, whereas there’s a whole bunch of unknowns if it had gone to Siemens.” Avaya’s interest in the deal is Nortel’s installed base of customer, and Avaya does not want them looking for other vendors through requests for proposals (RFPs), Gruia said.

“The more pain for the customers the more likely it is they will take it to an RFP.”

As a condition of the deal, Avaya is required to hire at least 75 per cent of Nortel’s enterprise employees.

Newman would not say how many Canadian Nortel employees would be retained by Nortel.

When Ericsson bought the carrier wireless business, it agreed to keep about 800 Nortel employees.

“We believe this combination provides for our current and future customers is investment protection – and a clear path forward,” Joel Hackney, president of Nortel Enterprise Solutions, said Monday during a conference call. “We absolutely will stand behind our customer commitments.”

Hackney said Nortel expects the deal will close in late December.

The US$915 million Avaya is paying is comprised of US$900 million in cash to Avaya and US$15 million in “employee retention.” Hackney said the companies have “not defined more details” on the $15 million.

With files from Shane Schick

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