In recent months rumors were flying around about Avaya beefing up its video business with an acquisition — Israeli-based RADVISION being the target. The acquisition chatter reached a peak on Wednesday, March 14, when Globes published an article about an imminent offer from Avaya.
Industry analyst Dave Michels at TalkingPointz blogged about a theorized marriage between the two companies back in December 2011:
So, I think this all makes sense. The industry is embracing/accepting/requiring video, Avaya needs a video partner, and Radvision has some good tech and (was at) a low price. So no one should be surprised. Nice theory.
I was discouraged by the rumors back then. Now the rumor proved to be true, I’m still uneasy about the deal…
We all know why Avaya shelled out the money for RADVISION. Video is taking off, Avaya’s video portfolio is weak, Cisco had bought TANDBERG, blah blah blah. But is this deal a vision or a delusion? Is the acquisition rad or bad?
I think it’s all about the timing… Avaya had filed IPO papers to go public in April, a time that’s fast approaching. The buzz about its finances and IPO has taken a dive recently with reports of its poor financial health and its IPO being “remarkably dangerous” as analyzed by The Motley Fool:
1. Avaya is still unprofitable. Though net losses narrowed to $26 million from $180 million in last year’s fourth quarter, history doesn’t give much reason for optimism. Earnings have run consistently negative since 2007. Revenue is up 5.5% over that period.
2. The business is structurally weak. Avaya has one of the worst balance sheets you’ll see for a tech company. Liabilities are now 128% of assets, meaning Avaya owes more than it has in assets for funding growth. But the ratio is actually worse than that if you exclude the 74% of assets related to intangibles and goodwill.
3. Cash isn’t flowing. After several years of shrinking cash flows, Avaya burned through $300 million in fiscal 2011 to keep the lights on. That number fell to a better-but-still-awful $223 million through the 12 months ended in December.
We don’t yet know what valuation Avaya would seek, but it couldn’t possibly be cheap given reported aims to raise $1 billion in fresh capital. Peer Cisco is valued at roughly $108 billion, and Avaya is second only to Cisco in selling telecom gear. I can’t imagine this company coming public at a reasonable price.
If there’s one thing private equity hates to read about before an IPO it’s news that instills FUD into the hearts of potential investors. So PE puts up cash — not too much, just enough to counter the negative publicity, and in this case, about $230 million. A buyout that definitely makes sense, but more importantly, a move that aims to wipe out the forlorn gaze of the IPO investors.
Also, notice that the deal closed in cold, hard cash. Hmmm, trying to prove something?
Why wait till now to pull the trigger? If the goal of the IPO is to raise $1 billion, why not spend the $230 million on RADVISION after getting the $1 billion in cash? Is the Avaya board telling us that RADVISION at $11.85 per share was such a steal that it was too good to pass up immediately?
Find a comfortable seat and grab some popcorn, the Avaya story is about to become even more intriguing…