Category Archives: Bankruptcy

Avaya’s Struggles Slip Under Industry Radar

As public companies, Nokia and Research In Motion have drawn considerable press coverage relating to their ongoing struggles. Nary a day passes without a barrage of articles on the latest setbacks and travails affecting both companies.  Some of the coverage is decidedly morbid, even ghoulish, with death-watch speculation on how soon one company or the other might be sold off or otherwise expire. 

Perhaps because it is private, Avaya has escaped such macabre notice from the mainstream business media and the industry trade press.  Nonetheless, speculation has arisen as to whether the company, richly backed by private-equity sponsors Silver Lake Partners and TPG Capital, has a future any brighter than the dim prospects attributed to RIM and Nokia. 

Abandoned IPO Hope  

At this particular juncture, the prospect of an IPO, which once seemed tantalizingly close for Avaya, seems a remote and forlorn hope.  As I’ve noted on a couple occasions before now, Avaya’s IPO was scuppered not only by its wan growth profile, but also by industry and macroeconomic headwinds that show no sign of abating. 

If no IPO is in the cards, what happens to the company? While at least one blogger has speculated that bankruptcy could be an option, I suspect the deep-pocketed private-equity sponsors might have no choice but to prop up Avaya until a buyer can be found. Given Avaya’s tepid growth prospects, its daunting long-term debt overhang, a recent weakening of channel sales, and stiffening competition across its product portfolio, the company is unlikely to find itself in the driver’s seat in any negotiations with a prospective buyer, presuming one can be found.  

Stranded in Purgatory 

Meanwhile, Avaya stakeholders, including the company’s employees, are mired in a purgatory. Sources have suggested the company will consolidate facilities and further reduce headcount, but no major announcements have been made on either front.

With an IPO seemingly off the table as an exit alternative, all eyes turn to the company’s private-equity sponsors. One potential delaying tactic, which we could see before the end of this calendar year, is the potential departure of president and CEO Kevin Kennedy, who has served in that dual capacity since January 2009. We’ve already seen revolving doors in the executive suites along Avaya’s mahogany row, and “new blood” in the CEO office would buy time for the company’s financial backers to devise and articulate a compelling narrative for customers, channel employees, employees, and potential strategic acquirers. 

We’ll have more insight into Avaya’s circumstances soon. The company is due to report its latest quarterly results within the next month or so.   

Departures from Avaya’s Mahogany Row Thicken IPO Plot

My plan was to continue writing posts about software defined networking (SDN). And why not?

SDN is controversial (at least in some quarters), innovative, intriguing, and potentially  disruptive to network-infrastructure economics and to the industry’s status quo. What’s more, the Open Networking Summit (ONS) took place this week in Santa Clara, California, serving a veritable gushing geyser of news, commentary, and vigorous debate.

But before I dive back into the overflowing SDN pool, I feel compelled to revisit Avaya. Ahh, yes, Avaya. Whenever I think I’m finished writing about that company, somebody or something pulls me back in.

Executive Tumult

I have written about Avaya’s long-pending IPO, which might not happen at all, and about the challenges the company faces to navigate shifting technological seas and changing industry dynamics. Avaya’s heavy debt load, its uncertain growth prospects, its seemingly shattered strategic compass, and its occasionally complicated relationship with its channel parters are all factors that mitigate against a successful IPO. Some believe the company might be forced into selling itself, in whole or in part, if not into possible bankruptcy.

I will not make a prediction here, but I have some news to report that suggests that something is afoot (executives, mainly) on Avaya’s mahogany row.  Sources with knowledge of the situation report a sequence of executive departures at the company, many of which can and have been confirmed.

On April 12, for example, Avaya disclosed in a regulatory filing with the SEC that “Mohamad S. Ali will step down as Senior Vice President and President, Avaya Client Services, to pursue other opportunities.” Ali’s departure was effective April 13.  Sources also inform me that a vice president who worked for Ali also left Avaya recently. Sure enough, if you check the LinkedIn profile of Martin Ingram, you will find that he left his role as vice president of global services this month after spending more than six years with the company. He has found employment SVP and CIO at Arise Virtual Solutions Inc.

As they say in infomercials, that’s not all.

Change Only Constant

Sources say Alan Baratz, who came to Avaya from Cisco Systems nearly four years ago, has left the company. Baratz, formerly SVP and president of Avaya’s Global Communications Solutions, had taken the role of SVP for  corporate development and strategy amid another in a long line of Avaya executive shuffles that had channel partners concerned about the stability of the company’s executive team.

Sources also report that Dan Berg, Avaya’s VP for R&D, who served as Skype’s CTO from January 2009 until joining Avaya in February 2011, will leave the company at the end of this month.

Furthermore, sources also say that David Downing, VP of worldwide technical operations, apparently has left the company this week. Downing was said to have reported to Joel Hackney, Avaya’s SVP for global sales and marketing and the president of field operations.

On the other side of the pond, it was reported yesterday in TechTarget’s MicroScope that Andrew Shepperd, Avaya’s managing director for the UK, left after just eight months on the job. Shepperd’s departure was preceded by other executive leave-takings earlier this year.

Vanishing IPO?

So, what does all this tumult mean, if anything? It’s possible that all these executives, perhaps like those before them, simply decided individually and separately that it was time for a change. Maybe this cluster of departures and defections is random. That’s one interpretation.

Another interpretation is that these departures are related to the dimming prospects for an IPO this year or next year. With no remunerative payoff above and beyond salary and bonuses on the horizon, these executives, or at least some of them, might have decided that the time was right to seek greener pastures. The company is facing a range of daunting challenges, some beyond its immediate control, and it wouldn’t be surprising to find that many executives have chosen to leave.

Fortunately, we won’t have to wait much longer for clarity from Avaya on where it is going and how it will get there. Sources tell me that Kevin Kennedy, president and CEO, has called an “all-hands meeting” on May 18.

For you SDN aficionados, fret not. We will now return to regularly scheduled programming.

Hackers Didn’t Kill Nortel

For a company that is dead in all meaningful respects, Nortel Networks has an uncanny knack of finding its way into the news. Just as late rapper Tupac Shakur’s posthumous song releases kept him in the public consciousness long after his untimely death, Nortel has its recurring scandals and misadventures to sustain its dark legacy.

Recently, Nortel has surfaced in the headlines for two reasons. First, there was (and is) the ongoing fraud trial of three former Nortel executives: erstwhile CEO Frank Dunn, former CFO Douglas Beatty, and ex-corporate controller Michael Gollogly. That unedifying spectacle is unfolding at a deliberate pace in a Toronto courtroom.

Decade of Hacking

While a lamentable story in its own right, the trial was overshadowed earlier this week by another development. In a story that was published in the Wall Street Journal, a former Nortel computer-security specialist alleged that the one-time telecom titan had been subject to decade-long hacking exploits undertaken by unknown assailants based in China. The objective of the hackers apparently was corporate espionage, specifically related to gaining access to Nortel’s intellectual property and trade secrets. The hacking began in 2000 and persisted well into 2009, according to the former Nortel employee.

After the report was published, speculation arose as to whether, and to what degree, the electronic espionage and implicit theft of intellectual property might have contributed to, or hastened, Nortel’s passing.

Presuming the contents of the Wall Street Journal article to be accurate, there’s no question that persistent hacking of such extraordinary scale and duration could not have done Nortel any good. Depending on what assets were purloined and how they were utilized — and by whom — it is conceivable, as some have asserted, that the exploits might have hastened Nortel’s downfall.

Abundance of Clowns

But there’s a lot we don’t know about the hacking episode, many questions that remain unanswered. Unfortunately, answers to those questions probably are not forthcoming. Vested interests, including those formerly at Nortel, will be reluctant to provide missing details.

That said, I think we have to remember that Nortel was a shambolic three-ring circus with no shortage of clowns at the head of affairs. As I’ve written before, Nortel was its own worst enemy. Its self-harm regimen was legendary and varied.

Just for starters, there was its deranged acquisition strategy, marked by randomness and profligacy. Taking a contrarian position to conventional wisdom, Nortel bought high and sold low (or not at all) on nearly every acquisition it made, notoriously overspending during the Internet boom of the 1990s that turned to bust in 2001.

Bored Directors

The situation was exacerbated by mismanaged assimilation and integration of those poorly conceived acquisitions. If Cisco wrote the networking industry’s how-to guide for acquisitions in the 1990s, Nortel obviously didn’t read it.

Nortel’s inability to squeeze value from its acquisitions was symptomatic of executive mismanagement, delivered by a long line of overpaid executives. And that brings us to the board of directors, which took complacency and passivity to previously unimagined depths of docility and indifference.

In turn, that fecklessness contributed to bookkeeping irregularities and accounting shenanigans that drew the unwanted attention of the Securities and Exchange Commission and the Ontario Securities Commission, and which ultimately resulted in the fraud trial taking place in Toronto.

Death by Misadventures

In no way am I excusing any hacking or alleged intellectual property theft that might have been perpetrated against Nortel. Obviously, such exploits are unacceptable. (I have another post in the works about why public companies are reluctant to expose their victimization in hack attacks, and why we should suspect many technology companies today have been breached, perhaps significantly. But that’s for another day).

My point is that, while hackers and intellectual-property thieves might be guilty of many crimes, it’s a stretch to blame them for Nortel’s downfall. Plenty of companies have been hacked, and continue to be hacked, by foreign interests in pursuit of industrial assets and trade secrets. Those companies, though harmed by such exploits, remain with us.

Nortel was undone overwhelmingly by its own hand, not by the stealthy reach of electronic assassins.

Bad and Good in Avaya’s Pending IPO

We don’t know when Avaya will have its IPO, but we learned a couple weeks ago that the company will trade under the symbol ‘AVYA‘ on the New York Stock Exchange.

Long before that, back in June, Avaya first indicated that it would file for an IPO, from which it hoped to raise about $1 billion. Presuming the IPO goes ahead before the end of this year, Avaya could find itself valued at $5 billion or more, which would be about 40 percent less than private-equity investors Silver Lake and TPG paid to become owners of the company back in 2007.

Proceeds for Debt Relief

Speaking of which, Silver Lake and TPG will be hoping the IPO can move ahead sooner rather than later. As parents and controlling shareholders of Avaya, their objectives for the IPO are relatively straightforward. They want to use the proceeds to pay down rather substantial debt (total indebtedness was $6.176 billion as of March 31), redeem preferred stock, and pay management termination fees to its sponsors, which happen to be Silver Lake and TPG. (For the record, the lead underwriters for the transaction, presuming it happens, are J.P. Morgan, Morgan Stanley, and Goldman Sachs & Company.)

In filing for the IPO, Avaya has come clean not only about its debts, but also about its losses. For the six-month period that end on March 31, Avaya recorded a net loss of $612 million on revenue of $2.76 billion. It added a further net loss of $152 million losses the three-month period ended on June 30, according to a recent 10-Q filing with the SEC, which means it accrued a net loss of approximately $764 million in its first three quarters of fiscal 2011.

Big Losses Disclosed

Prior to that, Avaya posted a net loss of $871 million in its fiscal 2010, which closed on September 30 of 2010, and also incurred previous losses of $835 million in fiscal 2009 and a whopping $1.3 billion in fiscal 2008.

Revenue is a brighter story for the company. For the one months ended June 30, Avaya had revenue of more than $2.2 billion, up from $1.89 billion in the first nine months of fiscal 2010. For the third quarter, Avaya’s revenue was $729 million, up from $700 million in the corresponding quarter a year earlier.

What’s more, Avaya, which bills itself as a “leading global provider of business collaboration and communications solutions,” still sits near the front of the pack qualitatively and quantitatively in  the PBX market and in the unified-communications space, though its standing in the latter is subject to constant encroachment from both conventional and unconventional threats.

Tops Cisco in PBX Market

In the PBX market, Avaya remained ahead of Cisco Systems in the second quarter of this year for the third consecutive quarter, according to Infonetics Research, which pegged Avaya at about 25 percent revenue share of the space. Another research house, TeleGeography, also found that Avaya had topped Cisco as the market leader in IP telephony during the second quarter of this year. In the overall enterprise telephony equipment  market — comprising sales of PBX/KTS systems revenues, voice gateways and IP telephony — Cisco retains its market lead, at 30 percent, with Avaya gaining three points to take 22 percent of the market by revenue.

While Infonetics found that overall PBX spending was up 3.9 percent in the second quarter of this year as compared to last year, it reported that spending on IP PBXes grew 10.9 percent.

Tough Sledding in UC Space

Meanwhile, Gartner lists Avaya among the market leaders in its Magic Quadrant for unified communications, but the threats there are many and increasingly formidable. Microsoft and Cisco top the field, with Avaya competing hard to stay in the race along with Siemens Enterprise Networks and Alcatel-Lucent. ShoreTel is gaining some ground, and Mitel keeps working to gain a stronger channel presence in the SMB segment. In the UC space, as in so many others, Huawei looms as potential threat, gaining initial traction in China and in developing markets before making a stronger push in developed markets such as Europe and North America.

There’s an irony in Microsoft’s Lync Server 2010 emerging as a market-leading threat to Avaya’s UC aspirations. As those with long memories will recall, Microsoft struck a valuable UC-centric strategic alliance — for Microsoft, anyway — with Nortel Networks back in 2006. Microsoft got VoIP credibility, cross-licensed intellectual property, IP PBX expertise and knowledge — all of which provided a foundation and a wellspring for what Microsoft eventually wrought with  Lync Server 2010.

The Nortel Connection

What did Nortel get from the alliance? Well, it got some evanescent press coverage, a slippery lifeline in its faltering battle for survival, and a little more time than it might have had otherwise. Nortel was doomed, sliding into irrelevance, and it grabbed at the straws Microsoft offered.

Now, let’s fast forward a few years. In September 2009, Avaya successfully bid for Nortel’s enterprise solutions business at a bankruptcy auction for a final price of $933 million.  Avaya’s private-equity sponsors saw the Nortel acquisition as the finishing touch that would position the company for a lucrative IPO. The thinking was that the Nortel going-out-of-business sale would give Avaya an increased channel presence and some incremental technology that would help it expand distribution and sales.

My feeling, though, is that Avaya overpaid for the Nortel business. There’s a lot of Nortel-related goodwill still on Avaya’s books that could be rendered impaired relatively soon or further into the future.  In addition to Nortel’s significant debt and its continuing losses, watch out for further impairment relating to its 2009 purchase of Nortel’s assets.

As Microsoft seeks to take UC business away from Avaya with expertise and knowhow it at least partly obtained through a partnership with a faltering Nortel, Avaya may also damage itself through acquisition and ownership of assets that it procured from a bankrupt Nortel.

What Cisco and Huawei Have in Common

Cisco and Huawei have a lot in common. Not only has Huawei joined Cisco in the enterprise-networking market, but it also has put down R&D roots in Silicon Valley, where it and Cisco now compete for engineering talent.

The two companies have something else in common, too: Both claim their R&D strategies are being thwarted by the US government.

Cisco Hopes for Tax Holiday

It’s no secret that Cisco would like the Obama Administration to deliver a repatriation tax holiday on the mountain of cash the company has accumulated overseas. The vast majority of Cisco’s cash — more than $40 billion — is held overseas. Cisco is averse to bringing it back home because it would be taxed at the US corporate rate of 35 percent.

Cisco would prefer to see a repatriation tax rate, at least for the short term, of a 5.25-percent rate. That would allow Cisco, as well as a number of other major US technology firms, to bring back a whopping war chest to the domestic market, where the money could be used for a variety of purposes, including R&D and M&A.

Notwithstanding some intermittent activity, Cisco’s R&D pace has decelerated.  Including the announced acquisition of collaboration-software vendor Versly today, Cisco has announced just four acquisitions this year. It announced seven buys in 2010, and just five each in 2009 and 2008. In contrast, Cisco announced 12 acquisitions in 2007, preceded by nine in 2006 and 12 in 2005.

Solid Track Record

Doubtless the punishing and protracted macroeconomic downturn has factored into Cisco’s slowing pace of M&A activity. I also think Cisco has lost some leadership and bench strength on its M&A team. And, yes, Cisco’s push to keep money offshore, away from US corporate taxes, is a factor, too.

Although Cisco is capable of innovating organically, it historically has produced many of its breakthrough products through inorganic means, namely acquisitions. Its first acquisition, of Crescendo Communications in 1993, ranks as its best. That deal brought it the family of Catalyst switches, a stellar group of executive talent, and eventual dominance of the burgeoning enterprise-networking market.

Not all Cisco acquisitions have gone well, but the company’s overall track record, as John Chambers will tell you, has been pretty good. Cisco has a devised cookbook for identifying acquisition candidates, qualifying them through rigorous due diligence, negotiating deals on terms that ensure key assets don’t walk out the door, and finally ensuring that integration and assimilation are consummated effectively and quickly.  Maybe Cisco has gotten a bit rusty, but one has to think the institutional memory of how to succeed at the M&A game still lives on Tasman Drive.

Acute Need for M&A

That brings us to Cisco’s overseas cash and the dilemma it represents. Although developing markets are growing, Cisco apparently has struggled to find offshore acquisition candidates. Put another way, it has not been able to match offshore cash with offshore assets. Revenue growth might increasingly occur in China, India, Brazil, Russia, and other developing markets, but Cisco and other technology leaders seem to believe that the entrepreneurial innovation engine that drives that growth will still have a home in the USA.

So, Cisco sits in a holding pattern, waiting for the US government to give it a repatriation tax holiday. Presuming that holiday is granted, Cisco will be back on the acquisition trail with a vengeance. Probably more than ever, Cisco needs to make key acquisitions to ensure its market dominance and perhaps even its long-term relevance.

Huawei Discouraged Repeatedly

Huawei has a different sort of problem, but it is similarly constrained from making acquisitions in the USA.  On national-security grounds, the US government has discouraged and prevented Huawei from selling its telecommunications gear to major US carriers and from buying US-based technology companies. Bain Capital and Huawei were dissuaded from pursuing an acquisition of networking-vendor 3Com by the Committee on Foreign Investment in the United States (CFIUS) in 2008. Earlier this year, Huawei backtracked from a proposed acquisition of assets belonging to 3Leaf, a bankrupt cloud-computer software company, when it became evident the US government would oppose the transaction.

Responding to the impasse, Huawei has set up its own R&D in Silicon Valley and has established a joint venture with Symantec, called Huawei Symantec, that structurally looks a lot like H3C, the joint venture that Huawei established with 3Com before the two companies were forced to go their separate ways. (H3C, like the rest of 3Com, is now subsumed within HP Networking. Giving HP’s apparent affinity for buying companies whose names start with the number 3 — 3Com and 3Par spring to mind — one wonders how HP failed to plunder what was left of 3Leaf.)

Still, even though Huawei has been forced to go “organic” with its strategy in North America, the company clearly wants the opportunity to make acquisitions in the USA. It’s taken to lobbying the US government, and it has unleashed a charm offensive on market influencers, trying to mitigate, if not eliminate, concerns that it is owned or controlled by China’s government or that it maintains close ties with the China’s defense and intelligence establishments.

Waiting for Government’s Green Light

Huawei wants to acquire companies in North America for a few reasons.  For starters, it could use the R&D expertise and intellectual property, though  it has been building up an impressive trove of its own patents and intellectual property. There are assets in the US that could expedite Huawei’s product-development efforts in areas such as cloud computing, data-center networking, and mobile technologies. Furthermore, there is management expertise in many US companies that Huawei might prefer to buy wholesale rather than piecemeal.

Finally, of course, there’s the question of brand acceptance and legitimacy. If the US government were to allow Huawei to make acquisitions in America, the company would be on the path to being able to sell its products to US-based carriers. Enterprise sales — bear in mind that enterprise networking is considered a key source of future growth by Huawei — would be easier in the US, too, as would be consumer sales of mobile devices such as Android-based smartphones and tablets.

For different reasons, then, Cisco and Huawei are hoping the US government cuts them some slack so that each can close some deals.

Avaya’s Kennedy Sends Cautious Signals on Post-Nortel Business

Reading between the lines of Avaya CEO Kevin Kennedy’s recent interview with Network World, I have the strong suspicion that revenues from Nortel’s installed base of VoIP and unified communications (UC) customers are not ramping as robustly as Avaya had hoped they would.

I get that impression as much from what Kennedy doesn’t say as from what he says. He’s bold and brash when talking about combined R&D efforts and product roadmaps, but he’s reserved when discussing revenue targets and near-term sales. He doesn’t say the Avaya-Nortel combination has been a commercial disappointment, but he’s not boasting of its conquests, either.

A few market analysts are noticing that Avaya’s acquisition of the Nortel enterprise business hasn’t resulted in market-share hegemony for the merged company. These market watchers seem surprised that Avaya didn’t take the Nortel customer base by storm and leave Cisco in its rearview mirror, choking on dust and fumes.

But that failure to reconcile with reality is at least as much the analysts’ fault as it is Avaya’s. Earlier in this saga, I noted that a Nortel-fortified Avaya would be fortunate to maintain any market-share edge over Cisco. It seemed an obvious conclusion to reach.

Unfortunately, though, when unwary market analysts examine a post-acquisition scenario, they will add the market share of the two companies involved, then assume the merged entity will maintain or extend its combined market share. For many reasons, however, that rarely — if ever — happens.

In the case of Avaya’s acquisition of Norte’s enterprise business, several complicating factors suggested that the merger, from a market-share perspective, would result in less than the sum of its parts.

First, there was the product overlap, which was not insignificant. Second,  there were channel-management issues, which also were considerable. (Some Nortel partners were concerned about having to deal with Avaya.) Third, Nortel’s enterprise business had been in distress for some time, and it was suffering market-share erosion before and after Avaya took control. Fourth, even among Nortel customers still in the fold, some eventually will choose options other than those presented by Avaya.

I think Avaya anticipated most (if not all) of these challenges. Just after the acquisition closed, for example, Kennedy sought to temper post-merger expectations. He cited external factors, such as the weak economy, as well as the usual post-merger integration challenges. His tone was one of cautious optimism rather than of unchecked exuberance. He knew it wouldn’t be easy, with or without Nortel’s enterprise business.

He’s staying on message, probably for good reason.

Nortel Plays Its Last Hand as it Solicits Bids for LTE Patents

I’m trying to make sense of the latest strategic leaks form the cratered, smoking compound once known as Nortel Networks.

Dow Jones Newswires reported last week that, “according to people familiar with the matter,” Nortel has yet to decide whether it will sell its remaining patent portfolio, which includes a large number of potentially valuable LTE patents, or to license them as part of the newfangled lawyer-driven business model that is all the rage in the courtrooms of East Texas.

Here’s an excerpt from the Dow article, as published online by the Wall Street Journal:

Nortel, which is being advised by Lazard and Global IP Law Group, is divided internally over whether to sell some or all its patents or whether to retain ownership and monetize the portfolio through a licensing program, according to people familiar with the matter. “There are still people at the company that want to license (the patents),” said a person familiar with the matter, adding that the portfolio consists of about 4,000 issued patents worldwide.

The solicitation of bids is aimed at determining how much the patents might fetch in an outright sale, the person added. “If they don’t get much interest,” the company will push for a licensing strategy, the person said. Ultimately, the fate of the portfolio rests with creditors.

But there’s the key to understanding what is likely to happen. If you were a Nortel creditor — and, for all I know, some of you might actually be Nortel creditors — which option would you prefer? Would you rather sell the patent portfolio, perhaps for somewhere in the vicinity of $1 billion (a nice neighborhood, by all accounts) to somebody like Research In Motion; or would you take your chances on a licensing business that will defer your financial gratification and realize diminishing returns on assets that will depreciate over time?

All things considered, you smart folks would want to pursue the sale, presuming you can attract a sufficiently attractive bid for the patent portfolio. That’s what I suspect all this talk about going into the licensing business is intended to achieve.

Nortel’s advisors at Lazard and Global IP Law Group aren’t saddling up for their first rodeo, and they want to set the stage for a bidding war that will ensure Nortel’s creditors get full value for what remains of the once-formidable company’s remaining intellectual property. They’re already soliciting bids, employing a stringent NDA that insists upon confidentiality regarding signing of the NDA itself as well as of the talks it facilitates.

Nortel and its creditors will be hoping an attractive offer precludes the company from having to become an IP-licensing outfit.

Despite Scuttlebutt, No News on Sale of Nortel LTE Patents

Many of you dear readers have an abiding interest in the fate of Nortel’s LTE patents, which represent a treasure trove to some and a collection of depreciating assets to others. Regardless of whether you perceive Nortel’s LTE patents as a glass half full or one that’s half empty, you probably will concede that they represent the last major asset pool under insolvent Nortel’s sagging corporate roof.

So, to whom are those patents going and at what price?

Despite the expectant buzz regarding an imminent auction or other disposition, Nortel appears in no hurry to resolve the matter. A Nortel spokesperson today, replying via email, had “no idea” on when or whether an auction or sale would be announced.

I have a feeling it won’t be too long before news surfaces. Nortel’s creditors will want to realize the value the patents represent.

Patent-Licensing Companies Signal Interest in Nortel’s LTE Portfolio

Although debate rages about the approximate value of Nortel’s unsold LTE and other wireless patents, a market for those patents is sure to materialize when the insolvent former telecommunications giant finally decides how to dispose of them.

Nortel retains more than 3,000 (some reports say 4,000) patents, many relating to OFDMA, MIMO, and other key attributes of LTE. It now must decide whether it will auction the patents, fold them into a joint venture with a partner company, or keep them and pursue long-term licensing agreements with its former competitors and technology partners.

I have seen estimates of the patents’ worth ranging from $400 million to $1 billion. Ultimately the market will determine value. Nortel’s creditors, not inclined to draw out the process, would prefer to see the patents auctioned rather than consigned to a joint venture or an ongoing business.

Two patent-hoarding companies already have voiced interest in bidding on the Nortel patents.

One is Wi-LAN Inc., which has about 800 of its own patents and annual revenue in its latest fiscal year of C$35.4 million. To consummate a deal for the patents, Wi-LAN might have to create a separate company, with institutional investors providing the necessary capital. Unless there isn’t much of a market for the Nortel patent portfolio, I don’t think Wi-LAN will come away with the prize.

The other party that has expressed a strong public interest in the patents is Mosaid Technologies Inc. In a Reuters story published earlier today, Mosaid’s CEO said his company is prepared for a “highly competitive auction process” for Nortel’s patents.

Said John Lindgren, Mosaid’s CEO:

“The one that is getting the most market attention is the LTE patents and we certainly do have an interest in those.”

“There are some patents that we see as very attractive. We find diamonds in the rock quite a bit. We got our eyes on the specific areas.”

Mosaid has 1,915 patents, but none relating to LTE. Like Wi-LAN, Mosaid might not have the financial resources to prevail in a competitive auction. Like Nortel, Mosaid and Wi-LAN are headquartered in Canada.

Another Canadian company, with considerably more resources at its disposal, already has expressed clear interest in Nortel’s LTE patent portfolio. That company, Research In Motion (RIM), could easily outgun Wi-LAN or Mosaid in an auction. Nortel’s creditors obviously will prefer the highest bid.

If Wi-LAN and Mosaid are RIM’s only competition for Nortel’s LTE patents, you’d have to like the BlackBerry vendor’s chances.

Picking the Carcasses of the Startups VCs Deserted

Startup companies continue to be left in the lurch as venture-capital firms retrench, but established technology vendors aren’t complaining. Instead, they’re benefiting from the situation, seizing the opportunity to pick off capital-starved, distressed startups at fire-sale prices.

A post at the Wall Street Journal’s Digits blog recounts how Silicon Graphics International (SGI) — a company that knows distress when it sees it — spent just $2 million to acquire Copan Systems, a vendor of data-storage hardware that had raised more than $107 million in venture capital since it was launched nearly a decade ago.

Mark Barrenchea, president and CEO of SGI, says his company’s acquisition of Copan represented “great value,” and it’s easy to see why. Still, I wonder what SGI got for its money. Copan had exhausted its operating capital, and one of its creditors had placed it in foreclosure and appointed a receiver.

Probably long before that point, most employees with survival skills and marketable talent would have bolted for the exits. They would not have waited around for last rites to be administered.

Given the circumstances, SGI was practically picking at Copan’s carcass. Then again, Copan had a technology-patent portfolio and an installed-base of customers. Even if it was operating more in word than in deed near the end of its venture-funded existence, its patents and customers gave it significant residual value.

SGI will continue to shop for deals among abandoned and forlorn startup companies. Others are doing likewise. It’s an advantageous time to be shopping for shards of value among the ruins.

Nortel Ponders Fate of LTE Patents

Not much remains of the once-proud Nortel Networks, but it retains a portfolio of 4,000 LTE and other wireless patents that have market value of as much as $1 billion, according to analyst estimates.

For a time, Nortel considered keeping the patents. Some within the disintegrating, insolvent company envisioned that it could be recast as a patent troll, staffed with more lawyers than engineers, punitively pursuing companies perceived to have encroached on its intellectual-property rights.

It still might choose that option, but other possibilities loom.

According to report in the Globe and Mail, Nortel is “exploring strategic alternatives to maximize the value” of the patents. The company has yet to decide how it will dispose of the patents, but alternatives apparently include an auction of the patents, a joint venture with a new partner, or long-term licensing agreements with wireless companies. That last option is a euphemism for becoming a patent troll.

What remains of the Nortel braintrust might be disinclined to auction the patents, but the Globe and Mail says the company faces mounting pressure from anxious creditors, suppliers, and pensioners who want all the assets divested.

While Nokia Corp. and Telefon AB LM Ericsson are said to have privately expressed interest in acquiring the patents, RIM bears watching in this context. Nortel’s LTE patents were and are of great interest to the BlackBerry purveyor.

Unlike the other potential acquirers, RIM can play the Canadian card to put pressure on the country’s federal government, arguing that such forward-looking intellectual property should remain in Canadian hands.

Just when we thought all the juice had been squeezed from the Nortel lemon, there might be one last lemonade sale.

Valley’s Commercial-Property “Bloodbath” Symptom of More Serious Malady

The sorry state of Silicon Valley’s commercial real estate is a symptom of a more serious malady.

Quoting commercial-property numbers from CB Richard Ellis Group Inc., Bloomberg reports that more than 43 million square feet (4 million square meters) of office space — the equivalent of 15 Empire State Buildings — stood vacant in Silicon Valley at the end of the third quarter, the most in almost five years. It is the biggest office-property glut to afflict the peninsula since the dot-com bust.

Bloomberg reports that about 21 percent of Silicon Valley’s Class A office space is vacant, as is 20 percent of low-rise “flex” (research and development) space, which can be used for offices or manufacturing, according to CB Richard Ellis.

Given the Valley’s persistently high unemployment rate — holding at about 12 percent — and the generally weak state of the broader economy, the situation is not expected to improve any time soon. With layoffs mounting at some of the Valley’s largest employers, a steady flow of jobs being transferred overseas, and a paucity of venture-backed startup companies to pick up the slack, the market dynamics don’t favor those who own and manage the area’s office buildings.

Foreclosures of commercial property are expected to double in 2010, and job growth isn’t anticipated to increase until 2012, according to some projections. Meanwhile, Valley companies that remain in business are unwilling to pay sticker-price rents, using the abundant supply of space as negotiating leverage for sharp discounts.

I suppose it’s good news for those seeking space. On the whole, though, the data suggests the Valley is in frail health. Unemployment is way up, commercial-property values are about to go way down, the traditional IT industry has tottered into slow-growth maturity and seemingly endless cost-cutting, the VC community has been decimated, and the social-networking upstarts depend (to a certain extent) on robust consumer spending that is unlikely to materialize in the near term.

The hope is that new industries can supersede information technology as the Valley’s growth engine. That could happen. Cleantech startups are drawing an increasing percentage of overall investment dollars, and the long-term prospects for that sector are bolstered by geopolitical as well as economic imperatives.

But it will take time. As the title of this blog proclaims (and has done for some time), we are witnessing twilight in the valley of the nerds.