Avaya’s Chapter 11 filing sends waves of disruption

Avaya employees, partners and customers already feel the effects of the company’s decision to file for Chapter 11 bankruptcy

Avaya’s Chapter 11 filing sends waves of disruption
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The numbers involved in Avaya’s Chapter 11 filing are big.

A company netting just under a $1 billion per year owes about seven years’ profits to repay the leverage heaped on the otherwise healthy company in an $8.2 billion private equity buyout in 2007.

It also has over 5,500 patents and was named in 2012 one the 100 most innovative companies in Silicon Valley. That’s just the beginning of the saga. There are many more stories to tell.

+ Also on Network World: Avaya says bankruptcy is a step toward software and services +

All hope for a fair and speedy resolution to the Chapter 11 filing, and so far, so good, according to multiple observers.

No one can argue, however, that the longer the process plays out, the greater the accumulated negative consequences across a spectrum of stakeholders. Those numbers above have to do with Avaya directly, but they represent only a small amount of what is at stake when you consider the accumulating impacts subjected upon an interdependent web of interests whose destinies are linked to Avaya’s fortunes.

Why Avaya filed for Chapter 11 restructuring

In a recent Network World article, John Sullivan, vice president and corporate treasurer at Avaya, wrote about the Chapter 11 filing:

“After looking at the multiple options of how to deal with our debt, we decided it was a critical next step in our transformation from a hardware company to a software and services company and the best path forward for our customers, partners and employees. [The company faced] two choices: refinance at ever-increasing interest rates, creating an unsustainable expense burden, or restructure our debt.”

With the company’s announcement began an outward flow of energy. For some, the news presented opportunity. For others, the news created uncertainty. The balance will be determined by, as Sullivan wrote, “a legal system that allows companies to restructure their balance sheets and continue to operate as healthy businesses, providing jobs, technology innovation and value to customers.”

Avaya's move positive for some

It’s important to note that many companies successfully emerge from the Chapter 11 processes. The processes also create advantages to others. At least one competitor, RingCentral, is publicly doing its happy dance in blogs, direct solicitations and ad buys. There are others who also benefit.

The advisory class is lining up, ready to rack up the billable hours helping customers plan their next move. There are also many lawyers who will generate tens, maybe hundreds of millions of dollars in fees.

It is important to point out that there are those who have a direct stake in the proceedings who have gone on the record to voice support of the decision by Avaya to seek the protection of the courts. One partner stated: “I think they will come out the other side a better company. In my opinion, they needed to go down this road. … Our customers should not expect to see any deterioration in service.”

My point here is to say that the entity that is Avaya is only the beginning of the story. There exist concentric circles of stakeholders, including that vocal partner, who, while the restructuring processes play out, and based upon the results, also feel repercussions. It is the impacts to them, the impacts beyond Avaya proper that is what this post is about. Of those impacted, many face weeks, months and possibly years of uncertainty.

Avaya's move from public to private

To understand all the ways Avaya’s situation impacts others, we need to consider where some of the money that funded the 2007 takeover of the company and subsequent cash injections came from. The story begins when the otherwise healthy company agreed to a transfer of ownership from the public markets to private equity.  It was a transaction that in other times would have been referred to as a leverage buyout (LBO). We don’t like using the term LBO as much these days because of the negative connotations gained in earlier periods.

In the case of Avaya, you had a profitable company that was rich with talent, stocked with intellectual property assets, and boasting a dynamic ecosystem of partnerships and a loyal customer base. The organization, which had earlier emerged to succeed from the rubble of the collapse of Lucent Technologies, today still generates positive cash flows and claims leadership in some of the most important markets for enterprise real-time communications.

Like a flipping house, the goal was assumed to be: take this valuable property, make a few upgrades, and put it back on the market. Best laid plans and all … the company today finds itself today seeking the protection of the courts. This brings me to the first concentric circle: the company’s creditors.

Avaya's private paradox

The word private in the context of commerce carries the connotation of “none of your business.” The mental image is that of rugged individualists risking their own fortunes in search of greater glory.

In operation, these transactions can be as if those privateering the company threw a big blue tarp over actions, actions that when the company is publicly owned would draw more daylight. The idea is that without that external interference, value that was hidden in the light of day can somehow be found and unleashed. Whether that is true can’t be known, just as it can’t be known whether a company and the ecosystems of people and other entities impacted would be better off had the company remained on the public markets.

One thing we know for sure is Avaya is in the current predicament because of the debt mostly incurred when it was taken private. Here is where the ripples of impact on others begin. 

The truth is that in context of the modern world of finance, “private” is a mythology.  How far from reality becomes apparent when you follow the money.

Private turns out to be very public

The notion that private equity is private falls apart in the face of facts such as those documented by the Center for Economic and Policy Research (CEPR) and other groups. Increasingly today, it is pension funds, government/sovereign wealth funds, and other interests that benefit from public largess, such as college endowment funds, which have lent the money, and in failure, who foot the bill. Then there are tactics like those CEPR has called the “frequent game,” played by equity companies to “dump pension obligations on the Pension Benefit Guarantee Corporation.”  

Unlike in other times, the economic systems in place today have kept default situations like that being experienced by the Avaya universe from causing the dramatic types of headlines of earlier decades. There is enough liquidity in the systems to absorb the defaults. That doesn’t make defaulting on debt right; it just makes the pain appear less by spreading it out. These relative ripples absorbed by the pension funds, endowments and other creditors might be considered what seismologists call “P-wave energy,” the first signs of a greater impending shaking. In the case of Avaya, the impacts do spread further. 

The broader reverberations of Avaya's Chapter 11 filling

Avaya's decision is impacting many, starting with those close to the company and emanating outward like the waves of a tsunami. Here the reverberations are rocking foundations of an ecosystem of stakeholders. The longer the Chapter 11 filing plays out, the farther the waves of disruption reach.

It is those who, in good faith, provided products and services who feel the first jolts. Beyond them, the ledger of the effected has many entries.

There are the people collecting pensions who have received letters stating that some of the retirement funds they depend upon have been abruptly halted. Payments from other parts of the pension plan continue, but a recent Wall Street Journal article said Avaya’s pension funds are “depleted after years of ultralow interest rates.” 

Avaya’s head of pensions and compensation said up until the Chapter 11 filing, the company has made all legally obligated contributions to the pension funds. Regarding the Journal article, an Avaya spokesperson said:

“The reporter deduced that funds were 'depleted' simply by looking the following numbers—(from the article):  

‘As of Dec. 31, 2015, Avaya’s U.S. pension plans had obligations of $3.15 billion and assets of $2.21 billion, according to retiree communications reviewed by The Wall Street Journal—a gap of nearly $1 billion.’”

For whatever reason, the pension is underfunded. However, Avaya’s spokesperson said, “It’s important to note that it’s not at all uncommon that pension funds are underfunded; this is by far not unique to Avaya or its current situation.”

Still it is not unreasonable for people to worry that this news may be a harbinger of greater cutbacks to come. Although ultimately insured by the Pension Benefit Guaranty Corp. (PBGC) and backed by the United States taxpayers (who in the case of a default would become yet another stakeholder), the Journal article states that “PBGC caps annual payouts.”

Then there are the many loyal customers who have pledged not only their treasure but also their energy, talents and professional reputations over many years in support of the company. An Avaya spokesperson told me many customers have expressed their confidence that the company will emerge healthy. The spokesperson also said new orders are strong and promised that lots of positive news will be coming out February 12-15 during the annual gathering of the International Avaya User Group (IAUG) taking place in Las Vegas. 

+ What do you think? Share your comments about the effect Avaya's Chapter 11 filing is having on people, customers and partners. +

Beyond retirees and customers, there is a vast web of companies also impacted. Many have built their business selling, supporting, innovating and sometimes are in existence because Avaya exists. Those companies also have employees, suppliers, retirees, etc. who are touched by the distant energy of Avaya’s reorganization.

The tally goes on. The further out you go, the less the impact may be, yet my point still stands. This is not just about Avaya.

The bottom line

As in the old saying, no man is an island, so too, no company is an atoll at sea. Now and into an indeterminate future, lawyers are racking up billable hours, competitors are sharpening their knives, and consultants, analysts and others are revving up the advice industry—some well informed and others, well, one might question the motives for some of what has been written.

The bottom line is that there are many stakeholders in this drama who can but hope for a speedy and equitable resolution to Avaya's Chapter 11 processes. It is in a lot of people’s interests, not only Avaya’s, but also the company’s creditors and the many others who exist in Avaya’s orbit. The urgency is that the company quickly emerges and resumes a history that goes back to the dawn of the technology age and has persevered across times of bounty and strife.

This article was updated to include comments from Avaya about the company's pension fund.

Copyright © 2017 IDG Communications, Inc.

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