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Avaya is reportedly negotiating with private equity companies and at least two competitors about selling portions or all of its multifaceted telecom portfolio.
Private equity firms are dazzled by Avaya's US$6 billion cash flow and low debt levels, according to a report in The Wall Street Journal. Silver Lake, a private equity firm that specializes in large scale, tech-driven growth industries, is one suitor. Other buyers interested in owning the company include competitors Cisco Systems (Nasdaq: CSCO) and Nortel Networks (NYSE: NT), the Journal report also said.
Nortel, according to accounts, was negotiating with Avaya earlier this month but the two firms could not come to an agreement. Cisco reportedly is interested in Avaya's IP (Internet protocol) phone switch product line, but may end up acquiring the entire firm.
Going Private
If Avaya is bought by a private equity capital pool, it will not be the first large tech provider to go this route -- nor, no doubt, the last.
"Given the pressures that the market puts on publicly traded firms, we'll likely see more tech companies considering going private," Rebecca Wettemann, vice president of Nucleus Research, told CRM Buyer. "Avaya's certainly not the first, as Kronos (labor management software) and other companies seek to deliver more value to customers by being less focused on quarterly targets and more focused on sustaining long-term customer satisfaction."
With the rising cost of regulatory compliance and Wall Street's unforgiving nature when it comes to quarterly earnings, more technology companies are sure to pursue this route, she said.
The customer relationship management and related technology industries are increasingly finding themselves to be attractive targets.
Recently announced acquisitions in this realm include Acxiom (Nasdaq: ACXM), which provides customer data integration technology, data products, database services, IT outsourcing, consulting, analytics and privacy services.
ValueAct Capital and Silver Lake joined together to acquire 100 percent of the company's outstanding equity interests in an all-cash transaction valued at $3 billion. Another deal announced the same week was Blackstone Group's intent to acquire Alliance Data Systems for $7.8 billion. Alliance Data is a best-of-breed business service provider, focusing on loyalty, customer service and transaction management.
Good for Customers?
Whether such deals are good for customers depend entirely on the acquiring firm and the role it expects the tech company to play in its investment portfolio.
Some private equity companies' sense of timing does not stretch much longer than Wall Street's, and they sometimes do not invest heavily in long-term product development.
Other firms, such as Blackstone, have honed the acquisition process to a fine art, and are more willing to sacrifice short term costs for long term profits.
The other traditional acquisition model seen in the tech sector is when firms are absorbed by competitors. This offers pros and cons to the acquired firm's customer base, which is most likely going to be the recipient of a hard cross sell campaign. However, if the acquisition saves the clients from a dwindling research and development budget, the deal is usually deemed worth it.
Avaya, if the accounts are true, has both types of suitors circling it, and no doubt is now calculating which model will work best for its circumstances.
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