Finally Private Equity won the battle for Avaya

On Monday, private-equity firms Silver Lake and TPG Capital agreed to pay $17.50 in cash for each share of Basking Ridge, N.J.-based Avaya. The buyout represents a 28% premium above Avaya's closing price of $13.67 on May 25, the last day prior to initial reports about a potential sale. Other companies in the telecommunications-equipment industry, such as Cisco and Nortel, also showed an interest in acquiring Avaya, but the high price offered by TPG and Silver Lake pushed them to the sidelines. Analysts say those companies might eventually renew interest if TPG and Silver Lake succeed in making Avaya more profitable.

By going private, Avaya executives say they'll be able to move faster to improve the company and worry less about meeting the short-term concerns of public investors. Yet the acquisition does nothing to diminish competition in what's a very tough market. Avaya has been battling Cisco Systems Inc. for the right to supply corporate customers with Internet-based phone systems. Other major rivals include Nortel Networks Corp. and Siemens.

So, what did Silver Lake and TPG see in Avaya that was so attractive? If they can work their financial and operational magic again, the equity firms should be able to reinvigorate the company and perhaps resell it at a profit. However, such a process could take three years or longer. Avaya’s business is very complicated to manage, that’s why equity firms have asked senior management to stay on to run the company. But there will have to do some tough restructuring.

First, the new owners have to fix Avaya's lower margin and less predictable service business and reduce the company's 20,000-strong workforce, even though no major layoffs are expected. Secondly, Avaya has to continue to invest significantly to retain its leadership in the corporate phone market. Actually, competition is intensifying in this space as a lot of players are trying to get into it. Aside from operational issues, Avaya and its new owners need to figure out how to generate faster sales growth, boost market share and improve mid-single-digit profit margins. Stronger growth is expected because of an anticipated global upgrade cycle. Corporations want to combine separate phone and data networks into one system to trim costs and take advantage of the new features offered by Internet technology. Let’s see whether management is up and around for the monumental challenge.