To Win Nortel, Avaya May Need to Make Concessions to Canada

Despite the ulterior motives and attempted misdirection of RIM, the Canadian government had no valid objection to Ericsson’s successful $1.13-billion bid for insolvent Nortel’s wireless assets.

In the case of Avaya’s $900-million bid for Nortel’s enterprise business, the situation is different. One could credibly argue, as Andrew Willis of the Globe and Mail has done, that Canada’s net benefit from Avaya’s acquisition of Nortel’s enterprise business is significantly less than what would have accrued from a successful bid by Siemens Enterprise Communications.

It isn’t surprising, then, that Canada’s federal government will review the Avaya purchase under the country’s foreign investment legislation, known as the Investment Canada Act.

Industry Minister Tony Clement explained that the review was automatically triggered because of the size of the deal. Under Canadian law, the government can review a sale to a foreign company if it considers it a threat to national security or if the transaction value exceeds C$312 million (US$287 million).

In this case, the deal is being reviewed strictly on valuation. The Canadian government chose not to review the Ericsson deal because the book value of the wireless unit was below the review threshold and because Ericsson’s ownership of the assets did not pose a national-security threat. Even if that transaction had fallen within the review threshold, Clement explained, it would have been approved because it was deemed to have offered sufficient net benefit to Canada.

Avaya, though, has reason for concern. Clement mentioned that Siemens intends to hire Canadians and expand wireless operations in Canada. Under Avaya, Canadian jobs will be less secure, and Avaya has made no firm commitment to expand wireless operations in Canada. Under Siemens Enterprise Communications, a worldwide headquarters would have been established in Toronto. Avaya has no intention of moving its headquarters from New Jersey to Canada, regardless of whether it obtains Nortel’s enterprise assets.

Fewer Nortel products are likely to survive under Avaya than under Siemens. That will result in fewer Nortel jobs, in Canada and elsewhere.

In light of the benefits offered by Siemens, Canadian opposition parties have objected vociferously to the Avaya bid. Canada is under a minority government, with an election possible at practically any time. The dissolution of Nortel, with the resultant loss of relatively high-value technology jobs, could figure into political calculations.

Clement has said Canada must send a signal to foreign bidders that it will review takeover deals on an impartial basis. He says the government will consistently apply the same standards when scrutinizing purchases of Canadian companies.

That may be so, but politicians being politicians, electoral calculations will figure, too.

At the very least, Avaya should expect to make some concessions to the Canadian government, perhaps in the form of binding commitments to jobs and R&D in Canada.

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