Category Archives: Private Equity

Avaya Executive Departures, Intrigue Continue

Like many other vendors, Avaya showed off its latest virtualized wares at VMworld in San Francisco this week. While putting its best face forward at VMware’s annual conference and exhibition, Avaya also experienced further behind-the-scenes executive intrigue.

Sources report that Carelyn Monroe, VP of Global Partner Support Services, resigned from the company last Friday. Monroe is said to have reported to Mike Runda, SVP and president of Avaya Client Services. She joined Avaya in 2009, coming over from Nortel.

Meanwhile, across the pond, Avaya has suffered another defection. James Stevenson, described as a “business-services expert” in a story published online by CRN ChannelWeb UK, has left Avaya to become director of operations for reseller Proximity Communications.

Prior to the departures of Monroe and Stevenson, CFO Anthony Massetti bolted for the exit door immediately after Avaya’s latest inauspicious quarterly results were filed with the Securities and Exchange Commission (SEC). Massetti was replaced by Dave Vellequette, who has a long history of of working alongside Avaya CEO Kevin Kennedy.

In some quarters, Kennedy’s reunion with Vellequette is being construed as a circle-the-wagons tactic in which the besieged CEO attempts to surround himself with steadfast loyalists. It probably won’t be long before we see a “Hitler parody” on YouTube about Avaya’s plight (like this one on interoperability problems with unified communications).

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.   

Tidbits: Cuts at Nokia, Rumored Cuts at Avaya

Nokia

Nokia says it will shed about 10,000 employees globally by the end of 2013 in a bid to reduce costs and streamline operations.

The company will close research-and-development centers, including one in Burnaby, British Columbia, and another in Ulm, Germany. Nokia will maintain its R&D operation in Salo, Finland, but it will close its manufacturing plant there.

Meanwhile, in an updated outlook, Nokia reported that “competitive industry dynamics” in the second quarter would hurt its smartphone sales more than originally anticipated. The company does not expect a performance improvement in the third quarter, and that dour forecast caused analysts and markets to react adversely.

Selling its bling-phone Vertu business to Swedish private-equity group EQT will help generate some cash, but, Nokia will retain a 10-percent minority stake in Vertu. Nokia probably should have said a wholesale goodbye to its bygone symbol of imperial ostentation.

Nokia might be saying goodbye to other businesses, too.  We shall see about Nokia-Siemens Networks, which I believe neither of the eponymous parties wants to own and would eagerly sell if somebody offering more than a bag of beans and fast-food discount coupons would step forward.

There’s no question that Nokia is bidding farewell to three vice presidents. Stepping down are Mary McDowell (mobile phones), Jerri DeVard (marketing), and Niklas Savander (EVP markets).

But Nokia is buying, too, shelling out an undisclosed sum for imaging company Scalado, looking to leverage that company’s technology to enhance the mobile-imaging and visualization capabilities of its Nokia Lumia smartphones.

Avaya

Meanwhile, staff reductions are rumored to be in the works at increasingly beleaguered Avaya.  Sources says a “large-scale” jobs cut is possible, with news perhaps surfacing later today, just two weeks before the end of the company’s third quarter.

Avaya’s financial results for its last quarter, as well as its limited growth profile and substantial long-term debt, suggested that hard choices were inevitable.

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.

Avaya IPO? Don’t Count On It

Reports now suggest that Avaya’s pending IPO, which once was mooted to occur this month, might not take place until 2013.

Sources who claim to be familiar with the matter told Reuters and Bloomberg that Avaya has deferred its IPO because of tepid demand amid competition for investment dollars from Facebook, the Carlyle Group, and Palo Alto Networks, among others.

Reconsidering the “Nortel Option

Well, if you are generously disposed, you might believe that particular interpretation of events. However, if you are more skeptical, you might wonder whether an Avaya IPO will ever materialize. If I were making book on the matter — and I’m not, because that sort of thing is illegal in many jurisdictions — I would probably skew the morning-line odds against Avaya bringing its long-deferred IPO to fruition.

Some of you found it amusing when I mooted the possibility of Avaya pursuing the “Nortel option” — that is, selling its assets piecemeal to various buyers — but I can easily envision it happening. Whether that occurs as part of bankruptcy proceedings is another question, though Avaya’s long-term debt remains disconcertingly and stubbornly high.

Despite recent acquisitions, including that of Radvision for $230 million earlier this month, I don’t see the prospect of compelling and sustained revenue growth that would allow Avaya to position itself as an attractive IPO vehicle.

Unconvincing Narrative

No matter where one looks, Avaya’s long-term prospects seem unimpressive if not inauspicious. In its core business of “global communications solutions” — comprising its unified-communications and contact-center product portfolios — it is facing strong rivals (Cisco, a Skype-fortified Microsoft) as well as market and technology trends that significantly inhibit meaningful growth. In networking, its next-biggest business, the company’s progress has been stalled by competition from entrenched market leaders (Cisco, Juniper, HP, etc.), the rise of aggressive enterprise-networking newcomers (Huawei), and a chronic inability to meaningful differentiate itself from the pack.

According to a quarterly financial report that Avaya filed with the Securities and Exchange Commission (SEC) last month, the company generated overall revenue of $1.387 billion during the three months ending on December 31, 2011. That was marginally better than the $1.366 billion in revenue Avaya derived during the corresponding quarter in the previous year. In the fourth quarter of 2011, products accounted for $749 million of revenue and services contributed $638 million, compared to product revenue of $722 million and services revenue of $644 million during the fourth quarter of 2010.

If we parse that product revenue, Avaya’s story doesn’t get any better. The aforementioned “global communications solutions” produced $667 million in revenue during the fourth quarter of 2011, up slightly over revenue of $645 million in the fourth quarter of 2010. Those growth numbers aren’t exactly eye popping, and the picture becomes less vibrant as we turn our attention to Avaya Networking. That business generated revenue of $82 million in the fourth quarter of 2011, a very slight improvement on the $78 million in revenue recorded during the fourth quarter of 2010.

Lofty Aspirations

Avaya can point to seasonality and other factors as extenuating circumstances, but, all things considered, most neutral parties would conclude that Avaya has a mountain to climb in networking. Unfortunately, it seems to be climbing that mountain without sensible footwear and with the questionable guidance of vertiginous  sherpas. I just don’t see Avaya scaling networking’s heights, especially as it pares its R&D spending and offloads sales costs to its channel partners.

True, Marc Randall, who now heads Avaya Networking, has lofty aspirations for the business unit he runs, but analysts and observers (including this one) are doubtful that Avaya can realize its objective of becoming a top-three vendor. Hard numbers validate that skepticism: Dell’Oro Group figures, as reported by Network World’s Jim Duffy, indicate that Avaya has lost half of its revenue share in the Ethernet switching market since taking ownership of Nortel’s enterprise business nearly three years ago. Furthermore, as we have seen, Avaya’s own numbers from its networking business confirm a pronounced lack of market momentum.

Avaya’s networking bullishness is predicated on a plan to align sales of network infrastructure with key applications in five target markets: campus, data center, branch, edge, and mobility. The applications with which it will align its networking gear include Avaya’s own unified communications and contact center solutions, its Web Alive collaboration software, and popular business applications that it neither owns nor controls.

Essentially, Avaya’s networking group is piling a lot of weight on the back of a core business that is more beast of burden than Triple Crown thoroughbred.

Growth by Acquisition?

Perhaps that explains why Avaya is searching for growth through acquisitions. In addition to the acquisition of Radvision this year, Avaya last year acquired Konftel (for $15 million), a vendor of collaboration and conferencing technologies; and Sipera, a purveyor of session-border controllers (SBCs). The Radvision acquisition extended Avaya’s product reach into video, but it probably will not do enough to make Avaya a leader in either videoconferencing or video-based collaboration. It seems like a long-term technology play rather than something that will pay immediate dividends in the market.

So the discussion comes full circle as we wonder just where and how Avaya will manage to produce a growth profile that will make it an attractive IPO prospect for investors. I’m not a soothsayer, but I am willing to predict that Avaya will sell off at least some assets well before it consummates an IPO.

Avaya IPO? Magic 8-ball says: Don’t count on it.

Brocade Engages Qatalyst Again, Hopes for Different Result

The networking industry’s version of Groundhog Day resurfaced late last week when the Wall Street Journal published an article in which “people familiar with the matter” indicated that Brocade Communications Systems was up for sale — again.

Just like last time, investment-banking firm Qatalyst Partners, headed by the indefatigable Frank Quattrone, appears to have been retained as Brocade’s agent. Quattrone and company failed to find a buyer for Brocade last time, and many suspect the same fate will befall the principals this time around.

Changed Circumstances

A few things, however, are different from the last time Brocade was put on the block and Qatalyst beat Silicon Valley’s bushes seeking prospective buyers. For one thing, Brocade is worth less now than it was back then. The company’s shares are worth roughly half as much as they were worth during fevered speculation about its possible acquisition back in the early fall of 2009. With a current market capitalization of about $2.15 billion, Brocade would be easier for a buyer to digest these days.

That said, the business case for Brocade acquisition doesn’t seem as compelling now as it was then. The core of its commercial existence, still its Fibre Channel product portfolio, is well on its way to becoming a slow-growth legacy business. What’s worse, it has not become a major player in Ethernet switching subsequent to its $3 billion purchase of Foundry Networks in 2008. Running the numbers, prospective buyers would be disinclined to pay much of a premium for Brocade today unless they held considerable faith in the company’s cloud-networking vision and strategy, which isn’t at all bad but isn’t assured to succeed.

Unfortunately, another change is that fewer prospective buyers would seem to be in the market for Brocade these days. Back in 2009, Dell, HP, Oracle, IBM all were mentioned as possible acquirers of the company. One would be hard pressed to devise a plausible argument for any of those vendors to make a play for Brocade now.

Dell is busily and happily assimilating and integrating Force10 Networks; HP is still trying to get its networking house in order and doesn’t need the headaches and overlaps an acquisition of Brocade would entail; IBM is content to stand pat for now with its BLADE Network Technologies acquisition; and, as for Oracle, Larry Ellison was adamant that he wanted no part of Brocade. Admittedly, Ellison is known for his shrewdness and occasional reverses, but he sured seemed convincing regarding Oracle’s position on Brocade.

Sorting Out the Remaining Candidates

So, that leaves, well, who exactly? Some believe Cisco might buy up Brocade as a consolidation play, but that seems only a remote possibility. Others see Juniper Networks similarly making a consolidation play for Brocade. It could happen, I suppose, but I don’t think Juniper needs a distraction of that scale just as it is reaching several strategic crossroads (delivery of product roadmap, changing industry dynamics, technological shifts in its telco and service-provider markets). No, that just wouldn’t seem a prudent move, with the risks significantly outweighing the potential rewards.

Some say that private-equity players, some still flush with copious cash in their coffers, might buy Brocade. They have the means and the opportunity, but is the motive sufficient? It all comes back to believing that Brocade is on a strategic path that will make it more valuable in the future than it is today. In that regard, the company’s recent past performance, from a valuation standpoint, is not encouraging.

A far-out possibility, one that I would classify as remotely unlikely, envisions EMC buying Brocade. That would signal an abrupt end to the Cisco-EMC partnership, and I don’t see a divorce, were it to transpire, occurring quite so suddenly or irrevocably.

I do, however, see one dark-horse vendor that could make a play for Brocade, and might already have done so.

Could it Be . . . Hitachi?

That vendor? It’s Hitachi Data Systems. Yes, you’re probably wondering whether I’ve partaken of some pre-Halloween magic mushrooms, but I’ve made at least a half-way credible case for a Hitachi acquisition of Brocade previously. With its well-hidden Unified Compute Platform (UCP), Hitachi has aspirations to compete against Cisco, HP, Dell and others in converged data-center infrastructure. Hitachi owns 60 percent of a networking joint venture, with NEC as the junior partner, called Alaxala. If you go to the Alaxala website, you’ll see the joint venture’s current networking portfolio, which is bereft of Fibre Channel switches.

The question is, does Hitachi want them? Today, as indicated on the Hitachi website, the company partners with Brocade, Cisco, Emulex (adapters), and QLogic (adapters) for Fibre Channel networking and with Brocade and QLogic (adapters) for iSCSI networking.

The last time Brocade was said to the market, the anticlimactic outcome left figurative egg on the faces of Brocade directors and on those of the investment bankers at Qatalyst, which has achieved a relatively good batting average as a sales agent. Let’s assume — and, believe me, it’s a safe assumption — that media leaks about potential acquisitions typically are carefully contrived occurrences, done either to make a market or to expand a market in which there’s a single bidder that has declared intent and made an offer. In the latter case, the leak is made to solicit a competitive bid and drive up value.

Hold the Egg this Time

I’m not sure what transpired the first time Qatalyst was contracted to find a buyer for Brocade. The only sure inference is that the result (or lack thereof) was not part of the plan. Giving both parties the benefit of the doubt, one would think lessons were learned and they would not want to perform a reprise of the previous script. So, while perhaps last time there wasn’t a bidder or the bidder withdrew its offer after the media leak was made, I think there’s a prospective buyer firmly at the table this time. I also think Brocade wants to see whether a better offer can be had.

My educated guess, with the usual riders and qualifications in effect,* is that perhaps Hitachi or a private-equity concern (Silver Lake, maybe) is at the table. With the leak, Brocade and Qatalyst are playing for time and leverage.

We’ll see, perhaps sooner rather than later.

* I could, alas, be wrong.

Sometimes a Deal is Just a Deal

What I think we see today at The New Times is an instance of a writer and his editors trying to find a pattern where none might exist.

The muddled result is reflected in the headline: “Are Mergers Back? Well, Sort Of.” The writers tries a variety of hypotheses, but his main thrust is to find confidence and optimism among an alleged tumult of M&A activity during the month of August.
However, as comments from prominent investment bankers quoted in the body of the story make clear, sometimes a deal is just a deal. Each one happens for its own reasons, and sometimes its significance doesn’t extend further than its own narrow specificity and frame of reference.

Seeing What We Want to See

As humans, we all like to see associations and patterns in what happens around us, whether we’re observing events in business, economics, politics, or technology. Occasionally, however, we see what we want to see, not what’s really there. I think that’s what happened in the New York Times today.

The writer wanted to see a new wave of market confidence in a putative surge of M&A activity.  There are two problems, though: The supposed surge might be nothing more than an uncoordinated spasm, and the confidence might not exist.

Reading the comments of the industry luminaries cited in the story, one could make a case that many of the latest mergers are driven as much by considerations of efficiency and savings as by any anticipation of robust market growth.

For Huawei, U.S. M&A Door Remains Closed

Huawei Technologies felt it would be different this time.

Back in 2008, Huawei was thwarted in its ambition to become a minority owner of 3Com, tagging along on an $2.2-billion acquisition bid by Bain Capital that ultimately was discouraged on national-security grounds by the Committee on Foreign Investment in the United States (CFIUS).

After that embarrassment, which caused a Huawei executive to term the American national-security concerns “bullshit” — if only because Huawei would have owned just 16.5 percent of 3Com if the Bain-led purchase had been approved — the Chinese network-gear company assumed a lower profile, licking its wounds and biding its time.

Better Luck This Time?

Huawei was strong in its home market, after all, and it was gaining momentum and customer patronage in Europe and in developing markets in Asia, Africa, and South America, too. It would have other opportunities to crack North America. Time was on its side.

In recent months, Huawei felt now was the time to step from the shadows again. The company believed circumstances had become more favorable, perhaps because of the worldwide economic downturn, perhaps because if felt that old doubts and reservations about its ties to the People’s Liberation Army (PLA) and China’s rulers had faded under a new presidential administration in the U.S.

Whatever the case, Huawei earlier this year got ready to take another high-profile plunge into M&A activity on American shores, this time without the cover of a private-equity partner. (One concern, which nobody uttered publicly back in 2008, was that Bain might have been acting as a temporary beard for Huawei, taking the majority share of 3Com up front only to sell it back to Huawei, which had a joint venture with 3Com called H3C, in increments. Was it true? We’ll probably never know.)

Lobbyists, Lawyers, and Investment Bankers

Just a few months back, according to sources quoted by Bloomberg, Huawei pulled out all the stops. It hired lobbyists, investment bank Morgan Stanley, and high-priced law firms such as such as Sullivan & Cromwell LLP and Skadden, Arps, Slate, Meagher & Flom LLP.

Even with all that well-connected hired help, and even though it outbid its rivals by a wide margin in two different acquisition forays, Huawei went home empty-handed. Again.

Indeed, as Bloomberg reported, Huawei outbid Nokia Siemens Networks (NSN) for Motorola’s telecommunications-networking unit and it offered more than Pace PLC put forward to close its purchase of 2Wire. In the case of the Motorola division, Huawei’s bid surpassed the one offered by NSN by more than $120 million.

In each case, the seller was concerned that a Huawei acquisition would be delayed or rejected on U.S. national-security concerns. As such, the sellers in both transactions sought to negotiate the simplest, surest deal rather than the one that offered the biggest payday. For its part, NSN got creative in negotiating an agreement with Motorola that indirectly boosted the value of its offer, allowing Motorola to argue that it had done its fiduciary duty in negotiating the best deal possible under the circumstances.

Motorola might even have gilded the lily by suing Huawei in the middle of July, alleging that the Chinese vendor had wrongfully obtained Motorola’s trade secrets relating to cellular-networking gear.

Back to the Stop Sign

Well, no matter how you cut it, Huawei has been rebuffed again. This time it had a coterie of well-heeled dealmakers in its corner, and it still was unable to overcome its own political radioactivity. Motorola and 2Wire, as well as their agents, were concerned that deals with Huawei might not be approved. Rather than take that risk, they went in a different direction.

What can Huawei do now? Short of an explicit announcement from the U.S. government that it will look favorably on Chinese network-equipment companies’ acquisitions of U.S. technology concerns — an unlikely scenario. to be sure — Huawei will remain at the same impasse that stopped it cold in 2008.

Thoma Bravo Sees Promise in SonicWALL’s UTM Plans

A reader asked me to comment on the acquisition of SonicWALL, so that’s what I’ll do now. Yes, I sometimes take requests, just like a washed-up lounge lizard.

The announced transaction has been well documented in the business and trade press. An investor group led by private-equity firm Thoma Bravo, and comprising the Ontario Teachers’ Pension Plan, will acquire SonicWALL in a deal worth approximately $717 million. SonicWALL shareholders will receive $11.50 per share in cash, a 28-percent premium over Wednesday’s close.

The deal already is being challenged by law firms alleging that SonicWALL and its board of directors breached fiduciary duties by agreeing to the proposal before diligently seeking an offer that would have provided better value to shareholders.

I don’t want to step into that fray, because it’s an inherently subjective debate based on market estimates from analysts who might or might not have applied accurate assumptions, methodologies, and statistical models. I have no idea how some analysts arrive at their forecasts — some perform thorough channel checks and build intricate spreadsheets, while others perform Santeria rituals with live chickens on neighborhood baseball diamonds under the cover of darkness.

I think you take my point. That said, I will note that the premium offered looks at least superficially attractive. What’s more, the fevered response to it from the wealth-redistribution agents of the legal profession tells you that SonicWALL is an asset that is not bereft of hope and promise.

Indeed, SonicWALL is a strong UTM-firewall and point-product security vendor in the SMB/SME space and across a number of vertical markets, including government, education, and healthcare. The company has built a strong channel presence, and its channel partners generally have a favorable view of the company.

In its latest quarter, just before this acquisition hit, its results did not suggest obvious signs of distress. You can do the math and employ your multiples based on those numbers, but this deal is about what the buyers think the company is worth going forward, not on what the company has done historically. My point regarding the recent financial results, though, is that SonicWALL’s wheels were not falling off.

SonicWALL faces a lot of competition in an Internet-security market that is consolidating on multiple fronts. Security functionality is consolidating, as evidenced by jack-of-all-trades UTM boxes from the likes of Fortinet and SonicWALL; and the market is consolidating, too. Bigger vendors are buying point-product purveyors in attempts to become one-stop shops for the security needs of SMEs and large enterprises alike.

That’s why SonicWALL’s management chose to do this deal. Thoma Bravo not only brings money to the table, but also a potentially coherent plan as to how SonicWALL fits into its existing stable of Internet-security and infrastructure companies. In previous transactions, Thoma Bravo has acquired security-management firm Attachmate, application and database-tool vendor Embarcadero Technologies, and authentication vendor Entrust. Conceivably, SonicWALL will benefit from access to this technology ecosystem and to its sales channels.

Meanwhile, Thoma Bravo saw considerable growth potential in SonicWALL. The vendor holds its own in the SSL VPN market, where it has about a 20-percent share, but the real promise is in UTM, which really is the next-generation firewall.

According to Frost & Sullivan, the UTM market was worth nearly $2 billion in 2009. The market-research firm expects UTM growth to increase through 2010 and 2011 before moderating in subsequent years.  Nonetheless, if the market researchers are right, the UTM space will reach revenues of $7 billion in 2016. With SMEs and distributed enterprises expected to account for the vast majority of those sales, SonicWALL is well placed to benefit.

This is where we have to come back to the competition, though. The company faces not only Fortinet, which rode to an IPO on its UTM exploits, but also Internet-security heavyweights such as Cisco, Juniper, and, to a lesser extent, Check Point.

One factor that could work in SonicWALL’s favor is that Cisco doesn’t seem as focused on Internet security as it has been. Not only has Cisco suffered from component shortages that deferred and cut into sales of its ASA boxes, but the Internet-gear colossus seems distracted by shinier, glossier market opportunities. Cisco also is less focused on serving SMEs than on catering to its large-enterprise and service-provider customers.

Looking ahead to the changing security demands occasioned by increasing virtualization and the adoption of cloud computing, SonicWALL is developing a new security God-box architecture under an Austin Powers-like moniker, Project SuperMassive. The company describes it as a “next-generation security platform and technology capable of detecting and controlling applications, preventing intrusions, and blocking malware at up to 40 Gbps without introducing latency to the network.”

According to SonicWALL, Project SuperMassive will implement a patented Reassembly-Free Deep Packet Inspection (RFDPI) engine to “provide increased insight into inbound and outbound network content without compromising security or performance.” SonicWALL says its new technology will intercept network threats that come from “anywhere and everywhere” and “scan everything.”

It all seems impressive, but the proof is in the pudding, or — in this case — the UTM. However it turns out, Thoma Bravo is buying a company with no shortage of technological vision.

As a postscript to this note, I will say that HP bears watching in the space. It’s possible, though by no means certain, that HP will acquire a vendor such as Fortinet to fill a gap in its HP Networking security portfolio.

Cisco’s Tandberg Acquisition Officially Approved, Dance for Polcyom Begins

When I first learned of the alleged acquisitive interest Apax Partners was said to have expressed toward Polycom, I dismissed it as nothing more than a media head fake.

Let’s consider: When news of that sort is leaked, it’s made public for a reason. In this context, it seemed, the reason was to bring others to the table. Somebody who has an interest in Polycom being acquired wanted to engender a bidding war for the company. It happens all the time.

There was something else, too. Apax didn’t seem a likely acquirer. Where were the direct synergies with Polycom in Apax’s investment portfolio? Where were the connections between Apax’s people and major vendors in the videoconferencing and unified-communications worlds? The deal didn’t offer enough risk mitigation for Apax; the pieces didn’t fit together.

Even if Apax had wanted to acquire Polycom, I’m not sure it had the conviction or the stomach to conclude the deal at the price Polycom would have commanded.

Now, though, Cisco’s acquisition of Tandberg has been consummated, and Polycom stands exposed. Polycom was Tandberg’s videoconfencing rival, and it’s a company of considerable importance to the UC strategies of more than one vendor.

We must consider the Cisco-Tandberg context, because contrivances like the leaked report of Apax’s interest in Polycom tend not to occur in a vacuum. Who’s supposed to step from the shadows and make a welcome bid, at an appetizing price, for Polycom?

There are a few candidates, including one that already has tipped its hand. That player is The Gores Group, 51-percent owner of Siemens Enterprise Communications. But The Gores Group’s bid was leaked, too, and we have to wonder why. Expect others to enter the picture, publicly or otherwise.

An obvious candidate is Avaya. Even though Avaya has barely digested its acquisition of Nortel’s enterprise business, it might feel as though it cannot let Polycom fall into other hands. In a perfect world, Avaya would not have to pursue Polycom now, immediately after assimilating and integrating Nortel.

Nonetheless, strategic imperatives might necessitate a move. Avaya is backed by the high rollers at Silver Lake, who rarely think small. They might not be willing to pass up the opportunity of taking Polycom off the board.

Who else? Not Dell. I can’t see it happening.

I don’t think HP will make the move, either. It’s got is own telepresence systems already, it’s very close to Microsoft in unified communications, and it wants to leverage Microsoft in the battle against their common enemy, Cisco.

Juniper is a possibility, but the company has signaled that it will grow organically, not through big-ticket M&A. Juniper will stay focused on building its intelligent network infrastructure and try not to get distracted by the action in the M&A casino.

IBM could make a move for Polycom, but I don’t think it will. Microsoft also enters the equation.

Yes, Polycom sells hardware, and Microsoft has steered clear of stepping on the toes of hardware partners such as HP. But there’s a way Microsoft could structure a deal that would be amenable to HP and its other hardware partners. All it takes a little creativity and ingenuity, and Microsoft retains plenty of that commodity on the enterprise side of its business.

If I were making book on which company will acquire Polycom, I’d make Silver Lake-baked Avaya the favorite, with Gores-backed Siemens Enterprise Communications the second choice, Microsoft the third option, with IBM next. Of course, in no way do I encourage illicit gambling on prospective M&A activity.

If you have theory on whether Polcyom will be acquired, and by whom, feel fee to share your thoughts below.

Rumor Musings: Avaya Acquisition of Polycom Plausible

Rumor buzz this week has intensified, and at least some it involves a mooted acquisition by Avaya of videoconferencing vendor Polycom.

Unless one is an insider — which, in this instance, I am assuredly not — one never knows whether rumors of these deals represent anything other than an optical illusion of smoke without fire. Insiders know what’s happening behind the scenes, but they’re not supposed to tell anybody, notwithstanding apparent evidence to the contrary as exemplified by the scandal involving Galleon Investments and others.

So, we’re left to play Sherlock Holmes in the technology markets, looking for clues and employing deductive reasoning to ascertain whether a given rumor possesses anything more than surface plausibility.

As it turns out, a case can be made for an Avaya acquisition of Polycom. It could happen. That doesn’t mean it will happen, and I am not advising anybody to bet the farm on such an outcome. It’s just that looking at Avaya’s strategic ambitions and how Polycom could further them, I could envision a scenario in which Avaya takes an acquisitive shine to its longstanding business partner.

The partnership, while not evidence that a closer relationship will ensue between the companies, represents coincident interests and a history of working together.

Additionally, let’s remember that Polycom might be amenable to a takeover in the wake of Cisco’s purchase of its primary videoconferencing rival, Tandberg. Polycom could continue to stand alone, but shareholders and other major stakeholders might be thinking that the timing and circumstances favor a sale.

Let’s also consider Avaya. The company bought insolvent Nortel’s enterprise business for more than $900 million at auction last fall. It’s still assimilating that purchase, dealing with product overlaps, roadmap questions, and channel issues. Still, when one considers the searing ambition that drove that acquisition and that continues to power the strategic thinking in Avaya’s executive suites, it would be folly to completely dismiss the potential for Avaya to make further M&A moves.

Avaya’s CEO is Kevin Kennedy, a former Cisco executive who subscribes to the same GE-inspired mantra as John Chambers regarding market focus, specifically the part about aiming to be first or second in every market a company enters.

Cisco and Avaya go head to head for market leadership in enterprise VoIP and unified communications. Meanwhile, video-based communication and collaboration are seen as the next major wave, with Cisco betting heavily on the space and Polycom moving into a prominent market position in videoconferencing on the back of its voice-conferencing franchise. Avaya could see ownership of Polycom as both a competitive necessity and a natural adjunct to its existing business.

Remember, too, that Avaya is a private company, richly backed by the munificence of private-equity houses Silver Lake and TPG. Being private, Avaya has more liberty than most public companies to devise and pursue a long-term strategy. Having the backing of Silver Lake and TPG potentially gives Avaya the means to swing for the fences.

There are reasons, perhaps many, why an Avaya-Polycom deal won’t transpire. This rumor, though, seems to have more plausibility than most I hear during an average week.

Avaya Wraps Deal for Nortel Enterprise Business, Prepares for Post-Merger Challenges

Now that Avaya has closed its acquisition of Nortel’s enterprise business, it must figure out how to meet new challenges as a bigger company with weightier expectations.

Owned by private-equity concerns Silver Lake and TPG capital, which bought the company for approximately $8.2-billion in 2007, Avaya now has paid $900-million for insolvent Nortel’s enterprise assets and $15 million for employee retention.

The pressure now will be on Avaya CEO Kevin Kennedy, a former Cisco executive who left to pursue his personal quest for a big chair after concluding that John Chambers wasn’t prepared to vacate his gilded throne. It will fall to Kennedy and his team to plot a course toward exit for the Nortel-engorged Avaya.

Kennedy might be on the clock, but he’s playing for time, too. In an interview with Reuters, he said an eventual exit for the company was contingent on external factors, mainly the global economy, as well as on his company’s strategy and execution.

The Avaya chief thinks the economy is recovering, but he said customers remain wary of making big investments and are targeting projects that provide near-term returns.

Said Kennedy:

“They speak as though there will be growth. But they are preparing for sometime during the calendar year for a setback. So they tend to be committing to projects that can be completed within six months rather than 12 to 24 months.

We believe that the economy will be some place between flat and up, cautiously up, I’d say. But we are also managing the company as though there could be a setback.”

Setback. He used that word twice in the two preceding paragraphs. A setback for the global economy would be a setback for Avaya’s customers, and that would represent a setback for Avaya and for its exit-seeking investors. (For those of you keeping score, I just used the word “seback” four times — five, if you include the reference in this parenthetical sentence — in this paragraph, thus trumping Kennedy in a competition in which he is an unwilling, unknowing participant.)

Kennedy prepared his company’s financial backers for a potentially long haul well before he spoke with Reuters last week, but it’s interesting that he is working so hard to temper expectations outside the Avaya boardroom.

Unwary industry observers, who are good at simple arithmetic but fail to take context into account, will add Nortel’s IP PBX market share to Avaya’s and conclude that the merged entity will have a combined 25 percent of the enterprise telephony space. They’ll excitedly point to that number and say that the Avaya-Nortel colossus will overwhelm Cisco, which holds about 16 percent of the market.

What they must remember, however, is that it won’t play out that way. Even though the Cisco of today doesn’t seem as invincible as the Cisco of yore, enterprise telephony and unified communications — the latter with its bandwidth-hogging video traffic — are areas where the computer-networking leader is unlikely to get lackadaisical.

More to the point, Avaya has to eliminate product overlaps with the Nortel portfolio. It also must deal with daunting channel-integration issues. A lot of customer confusion and uncertainty will result.

Taking all that into account, the keen industry watcher will realize that one plus one, in the case of post-merger market share, will not always equal three. Sometimes, as in this case, it doesn’t even equal two. When the dust settles about six to nine moths from now, Avaya will have done well to keep a market-share edge over Cisco.

Avaya has said it plans to sell and support all Nortel lines for 12 to 18 months. The company also said it will provide a migration plan for any products that it decides to phase out. With the Nortel brand not being part of the acquired bounty, future product releases from the Nortel side of the family will carry the Avaya name.

After closing its deal to acquire Nortel’s enterprises, Avaya now prepares for the heavy lifting.