A Nortel Renaissance?A Nortel Renaissance?

Would a private equity buyout save the day?

The Ottawa Citizen has been breaking some of the biggest Nortel stories, and their latest major effort is a report on the possible impending breakup of the company out of Chapter 11. The most tantalizing line in the story, to me, was this: "Among the possible acquirers of the Enterprise business are New Jersey-based Avaya, Siemens of Germany and a growing number of private equity firms."We knew about Avaya, Siemens, and one private equity firm, Golden Gate Capital. The interesting part is the "growing number" of private equity firms.

A lot of the discussion of the Enterprise unit sale has centered around the effect on customers if either Avaya or Siemens buys it--either acquisition would certainly complicate things for Nortel customers looking to plan their next generation migration path. Nortel product lines would almost certainly be phased out, even if they'd be supported for some period going forward.

A private equity buy--if it's by a firm without any other interests in the core communications platform business--would be much cleaner for Nortel customers. Golden Gate mostly fits this category; they own Aspect, so there'd be some rationalization in the contact center product line, but there'd be great incentive to strengthen the Nortel core communications platform going forward.

Private equity could also invest heavily in R&D. The downside, of course, is that private equity firms tend to slash jobs. But then, so do acquirers whose markets overlap with Nortel's as much as Avaya's and Siemens' do.

Instead of slogging through potentially multiple years of product line rationalization and possible culture clashes that come with being acquired by a competitor, a private equity buy would offer the opportunity for the new owners to bring in a fresh management team focused clearly on the next generation of the industry. Avaya's the template here: Bring in a bunch of ex-Cisco managers, and put a stake firmly in the ground of social networking, collaboration and cloud computing.

Furthermore, the new Nortel owners would probably enjoy one significant edge over Avaya, right out of the gate: They won't be servicing nearly as heavy a debt load from the acquisition. Silver Lake and TPG are still carrying much of the debt load from their $8 billion acquisition of Avaya, while there's been little expectation that Nortel Enterprise will sell for even $1 billion, if that. Of course, you get what you pay for, and the experience of the past year or so has clearly damaged Nortel, which saw orders plummet after the bankruptcy protection filing. So Nortel would definitely be more of a fixer-upper than Avaya was.

On the other hand, Nortel remains well within the second tier in market share, alonside Avaya, per Allan Sulkin's latest numbers. And Nortel customers remain loyal, almost to a fault. If a private equity buyer could retain that loyalty, it could turn the company around.

Ultimately, of course, all of this is relative. In what has to be a troubling sign for Avaya (and other competitors), Gartner apparently is reporting big gains for Cisco in the contact center market (Cisco has an internal blog on the report here; Gartner itself has the report behind its paid firewall.) What's troubling is that I've never heard anyone say that Cisco has a better contact center product than Avaya, yet Cisco clearly has momentum in this market.

Ultimately, the battle between Avaya and Nortel really is a battle for second place (or third, once you factor in Microsoft). So now you know why Avaya (and Siemens) want to buy Nortel.Would a private equity buyout save the day?