Next Steps in Your Avaya Chapter 11 JourneyNext Steps in Your Avaya Chapter 11 Journey
As Avaya inches toward reorganization, your job as a customer and steward to your organization is to be proactive about contingency planning.
April 20, 2017
As summarized in yesterday's No Jitter post, "Avaya Takes a Step, Not a Leap," Avaya submitted its debt restructuring plan and related disclosure statement on April 13 -- just shy of three months since filing for Chapter 11 -- with a stated goal of emerging from bankruptcy as early as this summer.
The filings outline a path for reducing the pre-filing debt load by $4 billion -- a reduction that would improve the company's financial flexibility and position it for long-term success, Avaya has stated. In the filing, Avaya also specified a debt-for-equity exchange with certain secured creditors. Unsecured creditors will share pro rata in a cash pool.
Earlier last week, on April 11, Avaya filed an exclusive delay motion, requesting an extension of its exclusive right to file a plan of reorganization within 120 days beyond May 19, or approximately Sept. 16. It did so with the intent of retaining Avaya's right to control the restructuring process.
Recap on Announcements Since Chapter 11 Filing
As I shared a few weeks back during the Enterprise Connect 2017 session, "Avaya Update: What Enterprises Need to Know Right Now," Avaya has repeatedly stated that it anticipates a positive outcome from the Chapter 11 process. For example, Avaya has said it:
Plans to continue operating business as usual
Expects to emerge as a stronger, healthier company
Is keenly focused on minimizing disruption to customers, partners, and employees
Has no planned discontinuation of any products or services as a result of the filing
Has no planned changes to customer, distributor, or partner programs
Other events since the Jan. 19 Chapter 11 filing include:
Availability of debtor-in-possession (DIP) financing -- Avaya is able to draw on $725 million DIP financing, which it has said will provide more than adequate liquidity to support ongoing business operations during Chapter 11
Company wages approval -- On March 20, the Chapter 11 judge approved the company's wages motion, authorizing payment of wages, salaries, commissions, and reimbursable expenses in the ordinary course of business; continuation of employee benefits programs; and resumption of incentive programs. (The court had previously approved the motion as to certain wages, salaries, and benefits on an interim basis.)
Planned sale of Avaya's networking business -- The next scheduled court date is mid-April (as I write this), with the transaction expected to conclude by June 30, which is the close of Avaya's fiscal third-quarter 2017)
As it works through the bankruptcy process, Avaya continues to invest in product development, a positive sign. As an example, here are several key announcements from the company's mid-February Avaya Engage conference:
Cloud -- Zang Office, Zang Spaces, Avaya Spoken, virtual cloud contact center on demand
Security -- Surge IoT
Partners -- Salesforce, HP, Amazon Web Services, Oracle, Arrow SI
As I see it, here is the timeline of events that have and will take place:
Continue to Page 2 for cautionary notes
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Caution Required
Positive news aside, an enterprise customer still must be cautious about the state of a company in Chapter 11 for the following reasons:
Possible erosion of perceived value -- In order to transition out of Chapter 11, and to optimize the value of Avaya as a company and its shares, Avaya must keep the public informed of where it is in the Chapter 11 process and present as positive a view as possible. Avaya must minimize any erosion to its base (of more than 100 million endpoints) and continue to bring in new sales, difficult as that can be while it is in Chapter 11.
Avaya's debt is significant -- Avaya must overcome a mountainous level of debt in order to get whole again, and enterprise customers must take this into serious consideration since the company faces an uphill battle in getting out of debt. Based on the debt involved, I do not believe Avaya will be able to emerge from Chapter 11 quickly. The following chart shows the debt at $6 billion (not including $1.78 billion in unfunded pension liabilities), with net EBITA at $924,000 last fiscal year. Of its $3.7 billion in new business in the fiscal year, Avaya's new customer revenue was 13%, or $481 million (again, as noted above, new sales could erode during the Chapter 11 period). Avaya's networking business is estimated to sell at $100 million (or 1.7% of the $6 billion debt).
The final outcome for Avaya is still unknown -- It's too early in the timeline of Avaya's Chapter 11 journey to determine what the final outcome is going to look like, as much of this is up to the bondholders and whether they will agree with Avaya's restructuring plan going forward. Avaya has clearly stated that the plan for reorganization it filed last week will not be the final plan.
Avaya's stock is not a good investment -- Avaya's announcement from last week cautions any investment in Avaya stock. To quote the company:"... security holders are cautioned that trading in securities of the Company during the pendency of these Chapter 11 cases will be highly speculative and will pose substantial risks. It is possible some or all of the Company's currently outstanding securities may be cancelled and extinguished upon confirmation of a restructuring plan by the Bankruptcy Court. In such an event, the Company's security holders would not be entitled to receive or retain any cash, securities or other property on account of their cancelled securities. Trading prices for the Company's securities may bear little or no relation to actual recovery, if any, by holders thereof in the Company's Chapter 11 cases. Accordingly, the Company urges extreme caution with respect to existing and future investments in its securities."While Avaya must make such statements publicly, they are cautionary just the same.
Continue to Page 3 for your next steps
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Your Next Steps
As I outlined in my earlier No Jitter post, "Avaya Users: Time to Build Your Contingency Plans," enterprises should be proactive during these times. Consider the following key questions, and attach action items to each:
Have you started your contingency planning? If not, your organization could face exposure. While you cannot control outside forces/circumstances, you can be proactive in dealing with possible outcomes. For example, you should be sure to associate potential outcomes with your corporate and strategic plans (some of the key areas for project approvals may lie in connecting specific corporate vision with your UC solution).
Have you evaluated any end of support associated with your infrastructure, and do you understand the possible risks of such? (One of our clients received notice that it would need to upgrade its system, at a cost of more than $350,000, or face complete end of support within eight months). Along the same lines, have you equated the inability to receive support during an outage to potential financial loss to your organization? (We have seen financial firms significantly affected by Hurricane Sandy and other multiday outages.)
Have you begun developing budgetary estimates for an upgraded or replacement system from Avaya or other vendor, including associated CAPEX and OPEX budget going forward? You'll need to do that, as well as socialize such with your executive management team. Many vendors, including Avaya itself, are offering significant discounts specific to Avaya customers.
Have you considered cost savings and cost avoidance to offset the CAPEX and OPEX costs associated with an upgraded or new UC system as part of an ROI strategy? As we've seen with some or our clients, these can be significant -- enough in most cases to pay for the CAPEX in less than 12 months. Being able to measure ROI is a requirement for most larger enterprises making multimillion-dollar decisions for upgrades or replacement UC infrastructure.
Have you considered some of the latest technologies that can add value to your organization? As seen at Enterprise Connect, these include communications platform as a service, Internet of Things, team collaboration, and artificial intelligence, among others. Some of these technologies may provide the leverage you may need to push forward with an upgrade or replacement.
Have you considered a cloud-based solution? Looking at cloud CAPEX/OPEX costs, we have found that total cost of ownership for a cloud solution can be anywhere from 30% to 100% higher than an on-premises solution over a seven-year period. However, cloud offers the flexibility to increase and decrease the number of endpoints paid for during high and low periods (during growth or downturns), building out the necessary infrastructure takes a fraction of the time, and many of the cloud providers are now delivering on the full UC and contact center suite today, not available from most of them as little as two years ago.
What are the dynamics or your organization? If you're going through mergers and acquisitions with disparate older telephony systems and/or newer UC platforms, for example, now is the time to consider a centralized UC strategy solution.
What is your organization's tolerance for risk? Consider how long are you comfortable managing a vendor's Chapter 11 status without affecting your organization's ability to communicate and collaborate in real time across regional, national, and global operations.
Are you meeting regularly (monthly or quarterly) with your Avaya team and staying up to date on the company's latest steps? Make sure these steps align with your organization's corporate strategy and timing requirements. (In most cases, Avaya will share status reports under NDA.)
Summary and Conclusion
If you have not begun your contingency planning as yet, it is time to do so. Being proactive during this Chapter 11 period is a requirement for you as a customer and as a steward to your organization.
