Avaya Won Nortel Auction, Confronts Integration Challenges

Arithmetic, particularly when it pertains to post-merger market share, can be a tricky business.

For example, now that Avaya has won the auction for Nortel’s Enterprise Solutions division in bankruptcy court, unwary mathematicians are assuming that the post-acquisition Avaya will augment its own market share with Nortel’s to vault ahead of Cisco in the $20-billion corporate-communications market.

It rarely works that way, and I don’t see it happening here. Most acquisitions are complicated matters, involving far more than simply adding the customers, revenues, products, channel partners, and employees of one company to those of another. Intangibles and imponderables always arise, because people are rarely as malleable and predictable as spreadsheets lead us to believe.

Avaya’s takeover of Nortel is complicated on many levels. First, there are questions as to whether the nearly $1-billion acquisition will be challenged on antitrust grounds. The acquisition likely will be approved by December, but, then again, it might not.

With Nortel being a Canadian company, there also is a risk that the acquisition might become a political football in a Canadian federal election. There is some question as to how many Canadian employees will find employment at Avaya.

Conversely, if Siemens Enterprise Communications, the other bidding in the auction, had won control of Nortel’s enterprise unit, a greater proportion of Canadian employees were expected to be retained for product management and product development roles.

Let’s assume, though, that no valid antitrust objections are raised. After all, the post-merger Avaya will not be appreciably ahead of Cisco in the corporate-communications market, and both will have to contend with other rivals in a reasonably competitive space. For the sake of argument, let’s also assume that Canada avoids a federal election this autumn or that Avaya somehow manages to avoid an unwelcome spotlight if a Canadian election does materialize.

Even with those obstacles cleared, Avaya would confront a significant challenge in integrating Nortel’s products, staff, channel partners, and partnerships with its own.

I see several potential pitfalls in the integration of the two companies, starting with a wide range of overlapping products in VoIP and unified communications (UC). On a product-by-product basis, even assuming Avaya chooses wisely in all instances, the company will be met with some unhappy customers whose products are being phased out in favor of Avaya’s preferred offerings.

Avaya’s channel strategy — specifically, it’s less-generous embrace of channel partners — also will alienate many of Nortel’s integrators and resellers, each of whom will consider defecting to competing products rather than joining the Avaya sales network.

Moreover, what will Avaya do with the UC partnership Nortel had established with Microsoft? Theoretically, that partnership might initially have looked good on paper for Nortel, but in practice Microsoft has benefited a lot more than has Nortel. Avaya will have to decide whether to keep fishing with Microsoft or to cut bait.

All the while, as Avaya waits for regulatory approval and resolves the many issues associated with integrating the acquisition, Cisco and other vendors will be attacking the installed bases of Avaya and Nortel. They’ll be exploiting customer concerns about the ongoing viability of products and manipulating reseller concerns about future relationships. They’ll also be exploiting concerns about Avaya’s commitment to short- and long-term product roadmaps and strategies.

As a result, Cisco will take away some accounts from Nortel and Avaya. That’s what happens during the interval between the announcement of an acquisition and its consummation, especially when the company being bought is distressed or failing. Just ask Oracle about the Sun acquisition.

That’s why the market-share mathematics of post-merger acquisitions are suspect, and why it’s premature for Avaya to suppose it’s on its way to clear market leadership in corporate-communications systems.

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