Avaya will restructure its debt under the protection of a Chapter 11 bankruptcy filing. The company aims to emerge from this action intact with minimal impact on customers. However, it is very possible that Avaya will sell its network infrastructure business.
Avaya is a leading enterprise voice and unified communications vendor with a significant portfolio of network infrastructure products that it inherited with its acquisition of Nortel in 2009. The networking portfolio includes data center and enterprise routers and switches, as well as a wireless LAN solution. Avaya’s networking business is well-regarded in terms of the quality of its products, but it has never been a core part of Avaya’s overall business, which is unified communications.
Networking was always going to be an uphill battle for a company like Avaya, given that the market is so heavily dominated by Cisco and the competition for second place is fierce among companies like Arista, HPE, Brocade, and Juniper. I think it makes perfect sense for Avaya to sell its networking business, but I don’t see an obvious suitor at this point.
Why is Avaya filing for Chapter 11?
Avaya says it currently has a 10-year-old debt structure that was assembled when Avaya was primarily a hardware vendor. Now it says 75% of its sales are software, which makes it difficult for Avaya to pay its creditors while also growing and innovating.
This argument makes sense. The shift to software means that most of Avaya’s new sales will generate moderate, recurring revenue, rather than large, up-front sales associated with hardware. With Avaya’s business model evolving, its debt burden becomes more difficult to manage.
To emphasize this point, Avaya released its quarterly earnings on the same day it announced its Chapter 11 filing. The company had a good quarter and a good year overall. The company is showing sales growth, which is not something you see from a failing business.
Avaya is open to selling assets
Avaya’s owners, private equity firms Silver Lake Partners and TPG Capital, reportedly put Avaya up for sales last spring. And more recently, news outlets reported that Avaya was in advanced talks to sell its contact center business, presumedly to pay down some of its debt.
Avaya acknowledged the pending contact center sale in a FAQ it released to the media:
We have been involved in constructive discussions with our key stakeholders to address our debt, and explored a wide range of alternatives, including monetizing assets. After extensive evaluation in consultation with our financial and legal advisors, the Avaya Board of Directors has determined that focusing on the Company’s debt structure is paramount and a sale of the Contact Center business at this time would not maximize value for Avaya’s customers and all of our stakeholders.
In other words, they are starting over. Avaya will certainly look at “monetizing assets” during its Chapter 11 restructuring, but they backed out of the contact center deal that the media reported on.
Given Avaya’s focus on reducing its debt and its apparent willingness to part with certain business units to achieve that goal, I think it’s very likely that Avaya will sell its networking business during this Chapter 11 restructuring… if someone offers the company a reasonable price.
It’s a buyers market for networking companies
If Avaya does try to sell its networking business, it will be at a disadvantage. There is already someone knocking on doors with a similar pitch. A few months ago network chip maker Broadcom acquired Brocade. Like Avaya, Brocade is a multi-billion dollar technology company that possesses a network infrastructure product portfolio that sits somewhat outside its core business (in Brocade’s case, storage area networking).
Broadcom’s biggest customers are network infrastructure equipment vendors, so it doesn’t want to own a company that competes against those customers. It has no choice but to sell Brocade’s networking business, which makes it a very motivated seller.
With Brocade’s networking business on the market, Avaya might not get the offer it wants for its own networking business. It will find itself competing on price with Broadom and Brocade. Is there more than one entity interested in acquiring a routing and switching business?
