NEW YORK – A merger between Avaya Inc. and Canada’s Nortel Networks Corp. could create a leading vendor of Web-based phone systems, analysts said on Tuesday, as talk swirled over a possible buyout bid for the U.S. telecommunications equipment maker.
Avaya has long been the subject of takeover speculation because of its small size compared to rivals like Cisco Systems Inc. and due to a growing number of companies vying to sell Internet protocol (IP) phone systems to businesses.
Such talk intensified over the weekend after Avaya postponed an investor conference and media reports said it was negotiating with potential bidders including Nortel and private equity firms.
Avaya did not give a reason for the postponement and did not provide a new date for the conference, and a spokesman declined to comment. The shares surged $2.05, around 15 percent, to $15.72 in afternoon trading.
“A combination with Nortel would create a dominant vendor,” Prudential analyst Inder Singh said.
“A private-equity-led buyout is possible, but it wouldn’t solve the issue of consolidation,” he said.
Analysts had varying views on market share, depending on how they classified the companies’ products. Singh said Avaya’s share in IP telephony was around 21 percent, nearly even with Cisco and set to rise to over 30 percent when combined with Nortel.
Avaya’s annual revenue, however, is only around $5 billion a year compared to $11 billion for Nortel and over $30 billion for Cisco, the top network equipment maker that sells routers and an increasingly diverse range of goods including software.
The Wall Street Journal reported that Avaya was in talks with private equity firm Silver Lake about a leveraged buyout, and had also held talks with Nortel about a possible deal.
Avaya and Nortel failed to agree on a price or whether Nortel would use cash or stock to fund the deal, but they were still in contact and a deal could materialize, it said.
The New York Times said Cisco, in addition to Nortel and Silver Lake, were interested in the Basking Ridge, New Jersey-based company.
Some analysts had previously said Cisco may not be too keen on an acquisition because the combination yielded fewer cost-savings opportunities, although it could boost its position as a dominant communications gear vendor.
J.P. Morgan analyst Ehud Gelblum said Nortel could have difficulty raising sufficient debt for an all-cash transaction, and said a combination of cash and stock was the most likely scenario in the event of such a deal.
He also said a takeout of Avaya at a 15 percent premium to Friday’s closing price would be accretive to the Nortel’s earnings if it could cut Avaya’s operating expenses by 11 percent.
Nortel and Silver Lake declined to comment on Monday.