In early 2017, Avaya announced their financial hardship to the world by filing for Chapter 11 bankruptcy. This filing will impact Avaya, as well as many U.S. subsidiaries, while most foreign affiliates will not be included. To understand the position of Avaya now, it’s worth noting that it’s actually made up of around 158 separate entities employing 9,700 people across the world. The entities filing for Chapter 11 represent around 3,800 employees.
Avaya has fallen a long way over the years. In 2007, it was free of debt, and the hardware-focused company had around $1 billion in the bank. However, the debt also started during that same year, when TPG and Silver Lake took the company private. The crash in 2008 destroyed near-term sales, and the private-company status of Avaya probably helped it to hold sturdy during this time while their competitor Nortel struggled. However, the Avaya debt mounted as the company purchased Nortel’s assets during bankruptcy, and today, Avaya’s debt comes to around $6 billion.
What Happened? The Telecom Shift
Perhaps the biggest problem for Avaya was that the industry was moving through a series of profound changes with new technologies, delivery methods and competitors. Additionally, telecom made the move away from hardware to software-based solutions designed for third-party servers. Apps replaced telephones, and customers gravitate towards monthly-rental solutions. As such, Avaya automatically struggled within a services and software-focused industry.
Though Avaya’s leadership attempted to reassure customers, spinning the filing as a “positive step forward”, according to CEO Kevin Kennedy, there’s still been some discomfort amongst many in the sector. Kennedy believes that Avaya is a healthy company structurally, and he even noted that the business had moved strongly from hardware to software in an effort to meet with the changing times. Additionally, during his reassurance, Kennedy drew attention to various well-known brands that had survived Chapter 11 filing – including General Motors.
Of course, most healthy companies don’t typically file for bankruptcy.
The Problem with Debt Restructuring
Though Kennedy indicates the success of Avaya, he also ignores the debt they’ve accumulated over the years. Of course, many companies would have impressive statistics to share if they ignored debt, and $6 billion is a lot to ignore. Unfortunately, the question is how to get rid of that debt for good.
Avaya has been looking into options, including the sale of huge divisions and intellectual properties, but none of these solutions have yet been acceptable to stakeholders or potential acquirers. For such an agreement to take place, voluntary acceptance would be required across the board.
Kennedy has mentioned debt-to-equity transfers as a possible solution, converting IOUs into stock certificates, but the tricky part of this would be agreeing on an exchange rate not once, but several times as the debt falls into multiple exchange rates, interest rates, and classes. Under Chapter 11, the negotiations will be determined by court, which eliminates the voluntary acceptance issue. However, this can be problematic, as corporate executives are often first obligated to company shareholders, while in Chapter 11, the court prioritises lien holders.
Innovation on Hold
There’s always the possibility that the Avaya debt could be restructured to allow the vendor to emerge from the issue intact. However, on the other hand, pieces could be sold to high bidders, and the logical chunks will be made up of around 5,400 patents and three business units, including UC, contact centre solutions, and networking.
While Avaya’s core portfolios are in reasonable shape, it’s financial burdens have stopped it from developing its own cloud services, therefore limiting efforts for marketing and profits. As innovation remains on hold, Avaya is in a state of limbo that’s tough to escape.