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Nortel Enterprise Division to be Sealed Sept. 11

TMCnews Featured Article


September 08, 2009

Nortel Enterprise Division to be Sealed Sept. 11

By Brendan B. Read, Senior Contributing Editor


The fate of Nortel’s enterprise division will be decided on Sept.11, 2009 in a formal auction at an undisclosed location in New York City. The dying communications technology firm received competing bids from companies, whose names it has declined to release, by the Friday Sept.4 deadline set for them.


Yet unless one of the bidders plans to make that Nortel unit a standalone firm the division is doomed, sooner or later, say industry sources. They cite uncertain futures that likely await the Nortel products under new ownership that may cause customers and resellers to shy away from them. On the other end bidders may have no choice but to consolidate to survive and take on powerful competitors in the IP space that business communications is moving into from TDM.

“We have received additional bids, but I can't tell you how many, and I can't go into any details on them," Nortel spokesman Jay Barta told the Canadian Press in a story reported Sept.4.

The rival bids mean that Avaya (News - Alert), which had a stalking horse agreement with Nortel for $475 million, will have to outbid the others for the unit. The likely players, according to analysts and competitors are Siemens Enterprise Communications Group (SEN Group), jointly owned by Siemens AG (News - Alert) of Germany and U.S. private equity firm The Gores Group, and MatlinPatterson, Nortel’s largest creditor.

What may happen with Nortel’s enterprise division would be similar if on smaller scale replay to what occurred with its wireless unit. There Nortel had a stalking horse agreement with NokiaSiemens for $650 million only to see Ericsson acquire it for $1.13 billion after witnessing other bidders, which it is speculated include MatlinPatterson, drive up the amount.

The Canadian Press reports that the enterprise division made $2.4 billion in revenues in 2008. In contrast the wireless division had made nearly double that amount in the same period.

“Just as we saw with NokiaSiemens, while Avaya was the first it doesn’t mean that it is the locked-on winner of the bidding war,” says Bob Hafner, managing vice president of Gartner Research's enterprise communications application team.

The Nortel enterprise division is attractive say analysts. The unit is large and lucrative and it has a range of popular well-engineered IP and TDM-to-IP migration products such as the CS 1000 line, and data solutions. It also offers a host of value-added products such as CallPilot Unified Messaging and the MCS 5100.

The Nortel unit also has strong channel partner arm, which is appealing to the likes of Avaya and Siemens especially as both firms are attempting to migrate sales from the direct model. Nortel has a big and loyal customer base.

Bidders that have similar lines to Nortel’s, like Avaya and Siemens could achieve economies of scale by consolidating offerings, support, and staff while meshing Nortel’s solutions and theirs to enhance existing or create best of breed products. Provided, if that is their strategy, they carefully migrate Nortel customers to the combined and/or native solutions so as not to lose them to competitors by going to an RFP open to other vendors.

If Siemens does put in what turns out to be the winning bid, besting Avaya, it will then become the dominant global player in the enterprise market, believes Ronald Gruia, principal analyst for emerging telecom at Frost & Sullivan (News - Alert). Siemens is the number one firm in this space in regions such as Western Europe and countries such as Brazil while Avaya is the key supplier in North America.

Having Nortel’s enterprise unit would also kickstart Siemens’ channel strategy, says Gruia, a former Nortel engineer. Siemens had said that it wants to generate 70 percent of the revenues from the channel within three years; it is at 15 percent currently. Buying a channel is easier and less time-consuming than setting up such a network from scratch.

“Siemens has a strong presence globally outside of North America, but has not been able to make strides in North America, mainly due to the strong performance of Avaya and Nortel,” Gruia points out. “Adding Nortel’s enterprise division would be more synergistic to Siemens from a geographic standpoint. This would add strength to Siemens in a region that has been historically more of an Achilles’ heel for the company.”

Both integrations with either Avaya or Siemens will result in product lines being cut, though, explains Gruia. In each case the overlaps will be a little different in how the companies manage to streamline their product lines. In the Siemens case if you are an existing Nortel customer chances are that Siemens might support you a little longer than Avaya because they would very eager to keep and build on their North American presence.

“Either way both companies would have good end of life (EoL) policies in place and ensure that the customers would be notified well in advance of any decision to take a product to its EoL,” explains Gruia. “What they both want to avoid is customer dissatisfaction as this would mean an RFP which might put the installed base they are acquiring at risk.”

That may be difficult. Whoever buys the Nortel division will have a hefty bill to pay, amidst an economy that is still weak, and will have to work hard to convince inherited resellers and customers to stay with it.

The technology shift from TDM PBX (News - Alert) hardware to IP software brings business communications into a dynamic innovative marketplace with fast-moving financially-solid players that are unencumbered with legacy support costs and which have strong direct and reseller networks. And changing software is easier than ripping out and disposing boxes.

Competitors are already lining up to capitalize on the auction outcome. They have been making public digs at the sale, and at possible buyers. The key asset from Nortel’s enterprise division: its channel network, may be fast depreciating. Suppliers have told TMCnet that they are seeing growing interest by Nortel resellers in carrying their lines instead. They point out in many markets there are both Avaya especially and Nortel dealers.

“If their customers had rejected Avaya or Siemens solutions in favor of Nortel, what makes them think they are going to buy Avaya’s or Siemens’s products if they acquire Nortel?” they asked.

“The biggest impact will be on existing Nortel customers,” John Combs, CEO, ShoreTel, told TMC Group Managing Editor Erik Linask (News - Alert), in an interview published in the ITEXPO show guide, distributed at ITEXPO that was held in Los Angeles, Calif. Sept.1-3. “Indications so far lead me to conclude that they will get the short end of the stick when Avaya no longer invests in the engineering resources required to maintain two separate products, and eventually forces Nortel customers to migrate to a new Avaya platform.”

Any consolidation leaves open the specter of plant and office closures. This threatens to make the sale of the Nortel enterprise division to a non-Canadian firm an issue in an increasingly likely fall election there. The unit’s employees work in Toronto, Ottawa, and in Belleville, Ontario. Both Avaya and Siemens have large facilities in the U.S. and minimal presence in Canada.

There has been growing speculation that the conservative minority government could be defeated in a nonconfidence vote as soon as Sept. 30 with an election in November. Parliament resumes sitting Monday Sept. 14.

There are widely conflicting polls including one showing growing Conservative strength and another indicating it and the second largest party, the Liberals, running neck and neck. Meanwhile the New Democratic Party, Canada’s third largest is coming off a convention that its proponents say is confident that it can make major inroads at the expense of the Liberals.

“Each company has to look at each individual lab and at what they are producing,” explains Gruia. “Siemens, which doesn’t have as large a presence in North America as Avaya, will in all probability welcome more Nortel engineers in the fold.

“As for Avaya it may make sense for them to keep Nortel employees here. I don’t think they necessarily want to move everyone to the U.S. It may happen but I don’t think it is likely. More than anything else Avaya is interested in being a good corporate citizen in Canada. If they buy Nortel they do not want to be perceived as a U.S. company that comes in, buys a Canadian company and then shifts all of its knowledge workers to the U.S., leaving just the sales/marketing people here to run satellite offices.”

To protect any such sale from political flak Gruia thinks the Canadian government’s Export Development Corporation should open a credit facility to finance sales from Canadian operations in exchange for job guarantees for a certain period of time. That method would enable smooth glide paths for the Nortel product lines and for the staff.

“Whoever wins Nortel’s enterprise division would want to keep a certain commitment to Canada, keep some Canadian presence from a pure global diversification perspective, in a country that is compatible with the U.S.,” says Gruia.

Brendan B. Read is TMCnet’s Senior Contributing Editor. To read more of Brendan’s articles, please visit his columnist page.

Edited by Patrick Barnard







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