February 6th 2017 - by Craig Lamb

If you have an Avaya system or you are thinking of buying one, read on.

With the recent financial crisis at Avaya, customers need to consider how to best protect their current assets and also plan for the future of their business Comms. We read a great article by Phil Edholm for nojitter.com that explains how Avaya customers may be impacted. It's in the second tab down and worth a read. Let us know what you think - remember, we're here to give you free advice on how you can utilise your current Avaya whilst making long term plans to upgrade to a Mitel telephone system, so feel free to get in touch. Find out how we can help you in your Avaya to Mitel transition, regardless of your size or business type, with our current 'Move to Mitel' promotion.

Check and Mitel - a trusted future for your Comms

On Thursday, January 19, 2017 Avaya Inc filed for Chapter 11 protection in the US. If you’re an Avaya customer or were considering Avaya in the UK, we're here to help.

With Check and Mitel, your investment is future-ready, even as you grow or shift between on-premises communications, cloud communications or a hybrid of the two. Mitel’s expansive portfolio of customer experience, mobility and collaboration solutions provide a unified, comprehensive platform for your business communications – no matter what the future holds.

That’s why Mitel has more cloud subscribers than Avaya and Cisco combined.

In an independent study by Synergy Research group, Mitel has more cloud communication users than any other company. With public, private and hybrid cloud deployment options, Mitel customers can find a cloud solution that meets their unique business needs, with complete confidence.

Last week Graham Bevington, Mitel's EVP & Chief Sales Officer, pointed out that:

'Every prospect and partner needs to be sure that its vendor has a secure future and can support long-term requirements. In the wake of news that Avaya has filed for Chapter 11 protection, I want to assure you that Mitel is a vendor to be trusted in these uncertain times. We provide a bright path to the future, the best path to the cloud, strong integration into various application environments, and a clear way to leverage prior investments.' Mitel is:

Mitel is the best Avaya alternative. Call Check on 03330 047 047 for impartial free advice about upgrading from Avaya to Mitel.
Mitel is:

  • Financially strong, stable and profitable
  • Trusted by over 60 million end users
  • A globally recognised leader
  • #1 provider of enterprise business communications in Western Europe and #3 in North America
  • #1 provider of cloud communications globally
  • Mitel is the only brand recognised across 5 Gartner Magic Quadrants for business communications
  • Exclusively focused on communications and collaboration

Contact Check for more advice

Avaya Bankruptcy: Good or Bad for Customers?

Avaya should be better positioned to minimize impact to its existing base than Nortel had been years ago, but quick agreement with creditors is crucial.

As regular No Jitter readers are no doubt well aware, and as many had been anticipating, last week Avaya filed for Chapter 11 bankruptcy protection. How the bankruptcy proceeds and how the company moves forward are key concerns for Avaya customers, employees, and the market in general. Having been through a somewhat similar event with Nortel in 2009, we can make some predictions as well as forge some key questions.

Nuts & Bolts Avaya's goal is to free itself from the shackles of the huge debt load left by the combination of the original private equity buyout and the Nortel acquisition. "We have conducted an extensive review of alternatives to address Avaya's capital structure, and we believe pursuing a restructuring through Chapter 11 is the best path forward at this time. Reducing the company's current debt through the Chapter 11 process will best position all of Avaya's businesses for future success," said Kevin Kennedy, Avaya CEO, in a prepared statement.
Avaya - what now for customers? It seems that Avaya's financial problems have been a long time coming.

Clearly the $6 billion of debt and the $1.7 billion of unfunded pension liabilities have been a major drag on the company. Avaya has had to generate about $900 million of earnings before interest, tax, depreciation and amortization (EBITDA) to cover debt and pension payments, as well as other costs, just to be cash neutral. With revenue decreasing at about 8% per year for the last four years, the strategy of increasing EBITDA percentage of the decreasing revenue to cover the debt and pension load would most assuredly have to fail at some point.

Before the bankruptcy, Avaya had investigated selling a business unit like contact center to raise cash, but due to a combination of business and technology integration with UC and other factors, the company has decided that was not practicable (see related post, "Avaya Keeps Crown Jewel, Contact Center"). Once Avaya realized selling off the contact center or other business was not a viable path, filing for bankruptcy sooner rather than later made sense since bankruptcy eliminates any further cash out for debt payments. That, combined with the $600 million in loans due in October, seems to have driven the decision.

Fast or Slow? What impact will this have for Avaya customers and partners? The primary question is how the Avaya bankruptcy will proceed. Will it be like the recent Aspect reorganization that took a little over two months, or will it shape up like Nortel's process, which took seven-plus years and resulted in the company's break-up? (See related post, "Why Aspect Isn't Another Nortel.)

Personally, I survived the Nortel bankruptcy. While Nortel had positioned it as a quick path to eliminate debt, creditors protested being washed out, resulting in a protracted process that broke the company up. While Chapter 11 is designed to enable continued operations and return to normal business (versus the total liquidation of Chapter 7), creditors have claims to all of a company's assets and cash. Those claims can prolong the bankruptcy process, and often lead to liquidation, which is what happened in the Nortel case.

Even though the Nortel bankruptcy took more than seven years to settle, within less than two months it had gone from a "quick debt elimination" to a fire sale. The key question is whether a company and all creditors have agreed or are near to agreeing on plans for how they will be treated in the process. A free-for-all can ensue, if not.

The difference between how the Aspect and Nortel bankruptcies played out serves as a good example. Note this line from a CFO.com article on Aspect's March 2016 filing (emphasis is mine): "In a Chapter 11 petition filed Wednesday, Aspect said a capital restructuring plan backed by its creditors would eliminate $320 million of second-lien debt and convert $60 million of first-lien debt into 100% of the reorganized company's equity." In other words, all creditors agreed what was going to happen prior to the bankruptcy filing.

To reiterate, with a plan in place with its creditors, Aspect emerged from Chapter 11 in fairly short order. Nortel, with no plan in place, took years to wrap up the process. In reviewing Avaya documents, I see no reference to a plan with creditors. This most likely means that each creditor (actually their lawyers) will go to the bankruptcy court requesting a plan to maximize its cash out of Avaya. The result may be an extended process to decide the right path, all while the business is languishing.

Comparing the Nortel and Avaya bankruptcies shows that Avaya should be better positioned than Nortel to emerge from the process. While Nortel revenue was higher ($10 billion versus $3.7 billion) and debt lower ($4 billion versus $6 billion), Nortel was breaking even or burning cash. Avaya, on the other hand, is profitable, especially when the debt payments are removed. In addition, the Nortel bankruptcy was international and involved all creditors, a fact that dramatically complicated the process and made for incredibly complex negotiations. As I've learned in discussions with Avaya, the company apparently does not plan to include the pension fund or normal business creditors as part of the bankruptcy process. Avaya will maintain and continue the pension (as did GM in its reorganization), and will continue to pay normal transactional creditors. This limits the negotiations to the senior and junior bondholders.

Whether Avaya can come to a quick agreement with creditors and move forward in the near term is a key question -- one that Avaya can't yet answer. As it said in an FAQ for analysts and consultants: "The timing of the outcome is dependent on negotiations with key stakeholders and the subsequent approval of the Court, among a host of other considerations, making it difficult at this point to project a timeframe for emerging from Chapter 11, but the Company's advisors are committed to completing this process so the Company may emerge from chapter 11 as quickly as possible."

Mitel is the natural Avaya alternative. Call Check on 03330 047 047 for impartial free advice
This makes it clear that Avaya has no plan in place and will depend on the court to define its path forward. However, Avaya and the court have already agreed to let Avaya have access to $425 million of the $725 million new loans arranged with Citigroup to assure the company has enough cash to move through the bankruptcy process. Hopefully, all the bondholders will realize that the best way to maximize their value as the new "owners" of Avaya is to expedite this process with quick agreement on a resolution. The challenge is getting the senior/first position bondholders to agree on the asset distribution ratios with the junior/second position creditors.

Shorter the Better Time is the enemy in a bankruptcy. Nortel Enterprise revenue, composed almost 100% from products and support, dropped by almost 50% over 2009 while the bankruptcy/sale went on. The impact on Avaya should be less, since it has services and cloud contracts that cannot be deferred or cancelled. However, a rapid decline in the product revenue would have a major impact on the business.

The reality is that creditors see all corporate money and assets as belonging to them, and they object if the "value" decreases (you are spending my money!!!!). In the Nortel bankruptcy, major plans and incentives were put in place not to burn any cash. I assume it will be similar for Avaya (the management team will have to present an operating plan to the creditors and the court in the next weeks).

As EBITDA and cash generation (without the interest payments) for Avaya are very good, unless revenues decrease, Avaya should see minimal impact on its organization and investments in the short term. However, if the bankruptcy is prolonged, to make up for that loss in revenue and not burn cash, Avaya will probably need to institute significant headcount reductions in all areas. That is exactly what happened at Nortel Enterprise during the period from January to December 2009. As the CTO/CSO for the business, I was tasked to lay off more than 50% of my team to meet the cost goals during that period. As my team was not directly involved with revenue (sales, delivery, etc.), the level of reductions was even higher than the average. In the Nortel bankruptcy, investing for innovation took a back seat to cash during the bankruptcy.

Unfortunately, I suspect that the Avaya customers will be even more conservative in approving Avaya purchases than the Nortel base had been -- they've seen this movie before. I recently talked to an Avaya customer that had just done an RFP and had decided on an Avaya upgrade over a Cisco rip and replace; I am very sure the company will put that decision on hold and revisit the entire process, starting today. In fact, in a recent public financial review, Avaya indicated that 13% of revenue came from new customers; that revenue is clearly at immediate risk.

One Way or Another... Considering all of this, what does the bankruptcy mean for Avaya customers? Clearly, the path forward is now very cloudy (pun intended). However, I do believe that, regardless of the bankruptcy's outcome, the Avaya businesses will go forward in some form and customers can be assured that their investments will continue to be supported and useable.

It is highly probable that the data business will sell quickly, while offloading the contact center business still comes with the issue of how to separate it from the UC and Aura Communication Manager core. Customers looking to do major upgrades or expansions can look at this as either a caution or an opportunity. For those that are looking at longer-range alternatives like Microsoft Skype for Business, holding back on investments may be the best alternative. However, companies that see the Avaya platform as a long-term strategic investment may find that negotiating upgrades and other purchases now will result in better pricing due to the pressures of the process.

I think we can all agree that a successful and vibrant Avaya is important to the industry. A wide range of choices is valuable in providing the right business communications solutions for organizations. In addition, Avaya/Nortel platforms support about 100 million endpoints, a significant part of global business communications installed base. And Avaya has recently demonstrated innovations in products like its Breeze open development platform; Oceana, its next-generation contact center platform; and the Equinox converged conferencing solution.

Avaya's success in this restructuring process is important and valuable to the industry as a whole. The bottom line is that the next few weeks and months will define the path forward. Personally, I hope that Avaya will announce an agreement with creditors by the end of February at the latest. If clarity on the Avaya path forward does not emerge by the time Enterprise Connect 2017 kicks off on March 27, I fear we'll have another Nortel-like experience on our hands -- and that means outcomes may be more challenging for Avaya customers, partners, and the industry overall.

The gun has sounded and the race is on... we should all wish the best for the Avaya team.

Contact Check for more advice

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