Avaya and Nortel and Skype, Oh My!

September 14, 2009

Back in 2007, Avaya announced its merger with investment firm Silver Lake. It was certainly no surprise in the industry that somebody might want to grab Avaya's assets. After all, Avaya was a sinking ship, but it was a ship loaded with some very talented engineers, good products, a customer base, and potential. It was not difficult to imagine that somebody might be able to turn things around at the troubled enterprise telephony company.

Two new events occurred in September 2009 that are worth taking note.

First, a group of investors backed by Silver Lake agreed to buy a majority interest in Skype, the world's leading consumer VoIP carrier. That's right, we called Skype a carrier. What else are they? They are the phone company for millions world-wide. It made sense for somebody to buy them since eBay wanted to unload them, but we found it odd that the investors were backed by Silver Lake. It is also worth mentioning that one of the investors, Mike Volpi, worked closely with the original founders of Skype, Janus Friis and Niklas Zennström, while he served as Chairman and CEO of Joost, also started by Janus Friis and Niklas Zennström.

Second, Avaya just agreed to purchase Nortel's enterprise business. Quite frankly, this looks like a disastrous move. After all, Nortel has a completely different and competing set of products. Converging product lines will be a huge challenge. Further, the cost of sustaining overlapping products will be enormous and there does not seem to be a lot of profit in that.

What has us puzzled is the Silver Lake presence in all of this. Directly or indirectly, Silver Lake will control Avaya, Nortel, and Skype. Will all of these be merged into a new enterprise equipment company that also provides cloud-based services? Will Avaya/Nortel/Skype be the world's largest phone company? This could be very interesting.