By Phil Edholm, former Nortel Executive, UCSrategies - Jan 19, 2017
This morning, January 19th, the day before the presidential inauguration, Avaya filed for Chapter 11 bankruptcy protection. What happens now 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, there are a few things that we probably can predict as well as some key questions.
First, Kevin Kennedy, Avaya CEO, said that in a statement that “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.” Clearly the $6B of debt and the $1.7B of unfunded pension liabilities have been a major drag on the company. Avaya has had to generate about $900M of EBITDA to cover debt payments, pension payments, and other costs to just be cash neutral. With revenues decreasing at about 8% per year for the last four years, it has become clear that the strategy of increasing EBITDA percentage of the decreasing revenue to cover the debt and pension load would have to fail at some point.
Prior to 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. Once it was clear there was no viable path by selling Contact Center to avoid bankruptcy, doing it sooner is better as it eliminates any further cash out for debt payments. That combined with the $600M loans due in October seems to have driven the decision.
What does this mean for Avaya customers and partners? The key question now is how the Avaya bankruptcy will proceed. Will it look like the recent Aspect reorganization that took a little over 2 months or will it look more like Nortel that took 7+ years and resulted in the company being broken up?
I lived through the Nortel bankruptcy. It was positioned as a quick path to eliminate debt, but the creditors have rights and they protested being washed out. While Chapter 11 is designed to enable continued operations and return to normal business (versus the total liquidation of Chapter 7), the creditors have claims to all of the assets and cash of the company. Those claims can result in an extended process and often it becomes a liquidation, which is what happened to Nortel. The Nortel bankruptcy is just settling now after 7+ years. The Nortel bankruptcy went from a “quick debt elimination” to a fire sale in less than 2 months. The key question is whether there is an agreed or near to agreement plan with all the creditors for how they will be treated in the process or if it is a free for all. A good example is the difference between Nortel and Aspect. Note this line in the Aspect announcement in March of last year: “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”. The key phrase is that the plan was backed by the creditors before the filing. In other words, all the creditors agreed before the bankruptcy was filed what was going to happen. Aspect emerged from Chapter 11 in a little over two months, Nortel had no plan and it took 7+ years. In reviewing the documents from Avaya, there is no reference to a plan with the creditors. This most likely means that the creditors (actually their lawyers) will go to the court requesting a plan to maximize their cash out of Avaya. The result may be an extended process to decide the right path, all while the business is languishing.
However, 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 ($10B versus $3.7B) and the debt was lower ($4B versus $6B), Nortel was break even or burning cash, while Avaya is profitable, especially when the debt payments are removed. The Nortel bankruptcy was dramatically complicated by the fact it was international and all the creditors were included, this made for incredibly complex negotiations. In discussions with Avaya, it appears that Avaya 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 di GM in their reorganization) and will continue to pay normal transactional creditors. This limits the negotiations to the senior and junior bondholders. The key question is whether this will be an extended process or if Avaya can come to a quick agreement with the creditors and move forward. In a set of FAQs for analysts and consultants, Avaya said: “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.” This makes it clear that there is no plan in place and Avaya will depend on the court to define the path forward for the company. 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 by agreeing quickly to a resolution.
In a bankruptcy, time is the enemy. Nortel Enterprise revenue dropped by almost 50% over 2009 while the bankruptcy/sale went on. Nortel Enterprise’s revenues were almost 100% product/support revenues, while Avaya has services and cloud contracts that cannot be deferred/cancelled, so the impact on Avaya should be less. However, if the product revenues decline more rapidly, it will have a major impact on the business. The reality is that the creditors see all money and assets in the company as belonging to them and they object if the “value” decreases (you are spending MY money!!!!). In the Nortel bankruptcy, there were major plans and incentives to not 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, there should be minimal impacts on the organization and investment in the short term. However, if the bankruptcy is not resolved quickly, to make up for that loss in revenue and not burn cash, there will probably be 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 over 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.
I suspect that the Avaya base will be even more conservative in approving Avaya purchases than the Nortel base was. They have seen this movie before. In a recent meeting, I was talking 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 that decision will be put on hold and the entire process will be revisited starting today. In fact, in a recent public financial review, Avaya indicated that 13% of their revenue was from new customers, revenue that is clearly at immediate risk.
After all of this, what does an Avaya bankruptcy mean for Avaya customers? Clearly, the path forward is now very cloudy (pun intended). However, I do believe that, regardless of the outcome of the bankruptcy, 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 be sold quickly, while selling the contact center still has the issues of how to separate it from the UC and Communications Manger 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 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.
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. Also, there are about 100M endpoints supported by Avaya/Nortel platforms, a significant part of global business communications installed base. And Avaya has recently demonstrated innovations in products like Breeze, Oceana and Equinox. 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/months will clearly define the path forward. Personally, I hope that Avaya will announce an agreement with their creditors by the end of February at the latest. If clarity on the Avaya path forward does not appear by Enterprise Connect, I fear the path is much more Nortel like and the outcomes may be more challenging for Avaya customers, partners, and the industry overall.
The clock has started………we should all wish the best for the Avaya team.
Avaya's Chapter 11 filing sends waves of disruption
By Guy William Clinch, NetworkWorld - Feb 10, 2017
Legally & Practically: What Avaya's Chapter 11 Means to Customers
By Marth Buyer, No Jitter - Feb 8, 2017
Avaya Partners Relieved by Chapter 11 Filing, Decision Not to Sell Call-Center Business
By Edward Gately; Channel Partners ~ Feb 01, 2017
Avaya granted $425m loan from US court
By James Pearce; Capacity Media ~ Jan 23, 2017
Avaya files for Chapter 11 bankruptcy, won't sell contact center assets
By Larry Dignan, zdnet - Jan 19, 2017
Multibillion-dollar phone firm deal may fall apart
By Josh Kosman, New York Post - Jan 4, 2017
The NRLN Avaya Retirees Chapter has been working on our data base trying to build a comprehensive Avaya retirees email list to be able to send news releases and updates about Avaya pension and benefits to those that are retired.
Our Chapter is representing all Avaya Retirees, Management, Office Salaried employees and both Office and Hourly Union Represented employees. There are currently around 8,000 Management retirees and a little over 7,000 in the Union represented pension plans. You can understand how much we can grow with your help.
We recently were able to collect around 700 additional names and some contact information from the OneExchange Insurance meetings held in Denver, Shreveport. LA, Basking Ridge, NJ and Omaha. We are in the final stages of data entry for the all these names at this time. Trying to read and decipher some of the names and other data are difficult and very time consuming.
To help with the updated data collection I am attaching a hot link that will take you to a web form that you can fill out and will be mailed back to me so I can create a data base of former retirees from all the different locations around the country. The Avaya Chapter of the NLRN would appreciate for all Avaya retirees that have not already registered to click on the form and submitting it back to us: http://www.123contactform.com/form-2450889/Avaya-Contact-Registration-Form . It is easy as 123…
Also, check out our NRLN and the Avaya Retirees Chapter’s webpage often for new information. To learn more about the NRLN at www.nrln.org.
Thanks in advance for your support in creating a strong NRLN Avaya Retirees Chapter to serve as your voice on the protection of our pension and other retirement security issues.
Please email or call with your questions or concerns.
Regards and Thank you.
Vern Larson, President
NRLN Avaya Retirees Chapter 402-203-6899 or email@example.com
Jeff Orley, Executive Member of Membership Committee
402-580-3743 - firstname.lastname@example.org
Cory Aesoph-Mangiaruca, Executive Officer for Union Retirees
Rick Madej, Executive Officer for Union Retirees
Tom Vierk, Executive Member of Accountancy
National Retiree Legislation Network – Avaya Retirees Chapter Contribution Form The NRLN is a nonprofit, tax-exempt organization. Contributions are not tax deductible.
Age __under 55; __ 55-64; __ 65 or over
Email Address (if available)____________________________
I get my retirement benefits from______________________________(name of company)
Mail with your check or money order (no cash) for $25, $50, $75 or more (any amount will be appreciated) payable to NRLN, Inc., P.O. Box 18757, Washington, D.C. 20036-8757