Jobs at stake as Nortel accepts Avaya's US$1B bid for its enterprise business

TORONTO - In a deal worth close to $1 billion, Nortel Networks announced Monday that Avaya Inc. was the successful bidder for its Enterprise Solutions division in a sale that's expected to close in December and could mean significant job losses in Canada.

TORONTO - In a deal worth close to $1 billion, Nortel Networks announced Monday that Avaya Inc. was the successful bidder for its Enterprise Solutions division in a sale that's expected to close in December and could mean significant job losses in Canada.

Avaya has agreed to pay more than US$900 million - nearly twice its initial bid - in return for one of the few remaining major assets of a company that had been once considered the flagship of Canada's high-technology industry.

In addition to Nortel's enterprise - or corporate - business, Avaya will get shares in its Government Solutions and DiamondWare businesses as part of the deal.

"We are extremely excited about this announcement removing a level of uncertainty and providing a clear path for our customers, our employees and our stakeholders to move forward," Joel Hackney, president of Nortel Enterprise Solutions, told analysts in a conference call Monday.

The auction, which began Friday, lasted days longer than expected.

Under the terms of the agreement, which is still subject to Canadian and U.S. court approvals expected Tuesday, Avaya will put up an additional US$15 million for a program designed to keep key Nortel employees on board.

Nortel refused to say how many employees would be affected.

The company attempted to allay angst over large-scale job losses by saying Avaya would employ a minimum of 75 per cent of Enterprise Solutions employees globally. That includes the full Nortel Government Solutions workforce as well as most of those working in countries where laws require employment to transfer automatically to a business purchaser.

Canada has no such rules, leaving employees vulnerable.

Nortel's enterprise unit supplies landline phone systems and other communications equipment to businesses, governments and other large organizations.

The division had US$2.4 billion in revenues in 2008 - roughly one-quarter of Nortel's overall revenue last year.

Avaya, one of Nortel's chief rivals in the office-communications market, made a $475-million stalking-horse bid in July that was intended to draw out other potential buyers for a formal auction process, which was conducted in New York.

Technology analyst Duncan Stewart of DSAM Consulting said the price was substantially higher than many had expected.

That might reflect Avaya's view that the real value of the enterprise division has been devalued in the market due to the difficulties and poor sales bankrupt Nortel has faced in the past year

"Not going through all of these difficult times, it would have executed better than it has so far, both on the customer side and the employee side," Stewart said.

Avaya CEO Kevin Kennedy said in a statement the acquisition would bring "inherent value to both organizations' customers, employees and partners."

Avaya, with 16,000 workers around the world, was spun off from Lucent Technologies in 2000.

A privately held New Jersey-based company, Avaya will face fierce competition in the office communications sector from Microsoft Corp. (Nasdaq:MSFT) and Cisco Systems (Nasdaq:CSCO).

The bankruptcy auction sale also faces possible antitrust action as well as objections from Verizon Communications Inc. (NYSE:VZ), a broadband and telecommunications company that has been one of Nortel's key U.S. customers.

In filings in a Delaware court last week, Verizon complained that Avaya was refusing to maintain contracts for equipment bought from Nortel that is in use by the U.S. federal government.

According to the documents, Verizon worried that Nortel would not be able to handle the contracts itself after the enterprise sale and that could put U.S. national security at risk.

Hackney said he did not expect the Verizon filings to affect the Avaya sale, saying Nortel is committed to supporting Verizon and its customers.

Two other unidentified bidders made unsuccessful pitches for the enterprise business, with reports suggesting U.S.-German joint venture Siemens Gore was one of them.

Hackney did concede that Nortel has been facing severe challenges as the company downsizes by way of asset sales.

Nortel has a supplier agreement with the 2010 Winter Games in Vancouver worth between $3 and $15 million.

"Nortel has been an exceptional partner of the 2010 Games and we are confident they will continue to meet their sponsorship obligations," said Ward Chapin, chief information officer of the Vancouver organizing committee.

"Nearly all of Nortel's commitments to the Games have been delivered and are already in place and will help us stage great Games next year."

Nortel still plans to auction its Metro Ethernet Networks business, which some analysts said could fetch up to $1.5 billion. A date has yet to be set for the auction or the submission process.

The company's ethernet division is considered one of its strongest assets because it includes the rights to technology that enhances the speed and capacity of current fibre optic networks by as much as 10 times. Faster connections are highly lucrative as more people watch video and transfer large files online.

Stewart called it the "crown jewel" of Nortel's technology and said a bid would likely be in the works as the market and economy improves.

LM Ericsson's agreed to pay US$1.13-billion for Nortel's wireless assets in an auction in July.

If all goes through, the upshot is that the once mighty Nortel could be reduced to a patent-holding company.

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