Mitel, Avaya moves could change client outlook

As Mitel Networks Corp. chases Inter-Tel Inc., and Avaya Inc. considers a pair of private equity partners, communication equipment vendors are undergoing some important changes that could affect their relationships with customers.Financial dealings are "a distraction" that could keep vendors from focusing on their client bases, says Roberta Fox, head of telecom consultancy Fox Group. But that's only the short-term situation. "In the long term, companies can come out better."It all depends on the deal in question - and these days, there are a few to consider, focused on two particular firms. Ottawa's Mitel has made a play for Tempe AZ-based Inter-Tel, a rival telecom equipment maker, for US$723 million. But what seemed a done deal when it was announced in April now looks to be far from finished.While Mitel hoped the merger would help it expand in the small and mid-sized business (SMB) arena, as well as boost its prospects among large corporations, investment firm Vector Capital Corp. announced its interest in acquiring Inter-Tel.Then in early June former Inter-Tel CEO Steven Mihaylo, who still owns Inter-Tel shares, reportedly sent a letter advising shareholders to reject Mitel's share-purchase offer. He proposed a plan to find new sources of capital instead.Last week Inter-Tel announced that Vector had pulled out, based in part on Mihaylo's recapitalization plan.A Mitel/ Inter-Tel combination might have an easier time attracting global multi-national companies - clients that sometimes prefer to do business with large, stable vendors, Fox says. "It's a smart move."The financial analysts at Mercator Capital also like the merger. In a research brief published last week, the Reston VA-based company pointed out that a Mitel/ Inter-Tel marriage is a one of equals: the organizations have similar revenue and market share (10% each). Most vendor mergers see a large firm swallowing a small one to fill a gap in the product list, or to keep the small firm out of a competitor's hands, Mercator said.Jon Arnold, an independent analyst in Toronto, says Mitel and Inter-Tel could combine their deep R&D roots for further advancements. As well, the two companies would create an SMB powerhouse. "A combined 20%...market share would actually make them number-1 in that market, ahead of everyone - Cisco, Nortel, Avaya, ShorTel, et cetera. Not a bad place to be."Meanwhile, Avaya seems to have settled for a buyout from private equity firm Silver Lake Partners and private investment partnership Texas Pacific Group Inc. (TPG) for US$8.2 billion or US$17.50 per share.Nortel Networks was reportedly interested in merging with the Basking Ridge NJ competitor - and it could still happen, notes Kevin Restivo, telecom industry analyst at the SeaBoard Group. He points out that the Avaya-Silver Lake/ TPG agreement includes a clause that opens the door for Avaya to find a higher bidder. "So there's still a chance" Nortel - or Cisco Systems Inc., or another Avaya rival, for that matter - would end up owning the company, he says.A combined Avaya/ Nortel entity might be able to spread costs over a larger customer base than either individual company would have alone, says Restivo. However, "the key with any of these deals is culture. Can they play together?"Nortel's product strategy is unclear, so it's difficult to say if the two companies would mesh, he says.Vendors sometimes use financial upheaval to their advantage: they poach clients from competitors involved in mergers and acquisitions, playing up the fear, uncertainty and doubt customers feel about the transactions, Restivo says.Arnold says Avaya might please some of its clients by staying away from Nortel or Cisco as partners. "Customers may breath a sigh of relief that Avaya is staying in the game and not throwing in the towel to go along with someone else. I am sure that customers worry about Cisco's dominance, and the desire to have bona fide choice and competition to keep Cisco honest. Nortel's star has really faded, and in North America, Avaya is really the only force that can counter Cisco and keep them in check."

Mitel, Avaya moves could change client outlook

News | June 11, 2007

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