Following Avaya’s entirely predictable fall in to US Chapter 11 bankruptcy Editor Ian Hunter examines the fallout taking place in the channel and the prospects for Avaya if and when it emerges from that process.
Avaya was spun off from Lucent, a former AT&T unit, in 2000. In 2007 the independent hardware company was debt free and had nearly $1 billion in the bank. Its future looked bright and it was attracting many suitors.
Among them were private equity firms TPG Capital and Silver Lake Partners who bought the company, a move many observers saw as way for them to ‘print money’. It was the height of the economic boom and the deal was structured as a leverage buyout. No problem was envisaged.
The tide of Avaya’s fortune turned sharply with the 2008 economic crash. Short term sales collapsed but hit competitor Nortel harder. Avaya’s debt however got even bigger when they purchased Nortel’s enterprise assets from that firm’s own bankruptcy.
And then the market underwent a significant change; it moved from hardware to software. Today’s systems are software-based and designed for third-party servers. And apps are replacing telephones.
Customers don’t even pay the lower purchase price; instead, they are gravitating toward a monthly rental model. Vendors are seeing their reduced revenue arrive over the life
of the system, rather than with the initial implementation.
Despite this Avaya dug itself into a hardware-sized hole in a software-and services-based industry. The result being that at its Chapter 11 bankruptcy filing in January Avaya listed $5.52 billion in assets and $6.36 billion
As a rule, healthy companies don’t file bankruptcy. So, what’s going on? Most analysts believe that for Avaya the chickens have come home to roost – it’s not possible to change a giant hardware-based vendor into a nimble cloud-based provider.
Since its Chapter 11 filing the company has secured a committed $725 million debtor-in-possession loan, a special loan used in bankruptcy cases, underwritten by Citibank which will keep the firm afloat in the short term
But in what form might Avaya emerge from bankruptcy? Avaya has said it does not want to sell off any parts of its business, for example its contact centre business which is considered to be the company’s Crown Jewells, and instead says it wants to address its overall debt problem.
What has history taught us? Well some firms do emerge from Chapter 11 however Nortel’s disastrous bankruptcy from 2008 took over 7 years to resolve.
Avaya’s move has the potential to cause much more disruption. For the call centre industry, this isn’t just any company. Avaya’s products, partnerships, and reseller network dominates this space globally like no other player.
Matt Townend of Cavell Group, a man who himself endured through the biggest Chapter 11 event the world has seen to date at WorldCom, says that in essence Avaya will not emerge looking the way it was.
“The assets are the values placed on its technology, its channels and its products. There has been no real progress from the company with PBX so that has little value other than the base. All the worth lies in their channels and their contact centre base and technology. I see it being split as no single company would be willing to buy the lot – there’s certainly not going to be any interest in their PBX technology.”
What is Chapter 11?
In a nutshell: In the US, when a business is unable to service its debt or pay its creditors, the business or its creditors can file with a federal bankruptcy court for protection under either Chapter 7 or Chapter 11 of the Bankruptcy Code
In Chapter 7, the business ceases operations, a trustee sells all of its assets, and then distributes the proceeds to its creditors. Any residual amount is returned to the owners of the company.
In Chapter 11, in most instances the debtor remains in control of its business operations as a debtor in possession, and is subject to the oversight and jurisdiction of the court
Dave Michels at Disruptive Analysis sums up our own views. ‘Avaya will pay a steep price in terms of lost revenue, customers, employees, and goodwill. Accounts will be lost, and competitors will become stronger. Avaya’s Chapter 11 position will dominate industry news for months with the majority of the stories being about the end of PBX telephony. Everyone will know Avaya is in bankruptcy.’ For resellers this will result in switching sales from Avaya to other vendor alternatives. This is NOT their fight.