Private Equity Snares Avaya

Forbes reports that two private equity firms, Silver Lake and TPG Capital, have agreed to purchase Avaya. While the purchase price of $8.2 billion or $17.50 per share isn't much of a premium to that market price of approximately $17.00, Avaya has been a lackluster business for several years now. The communications equipment maker has been cited as a potential takeover target due to an attractive balance sheet with lots of cash and little debt. Of course the business has struggled to actually make any money since Lucent Technologies blew a gasket at the end of the Dot Bomb.

Communications equipment makers are in a highly cyclical business. As a technology spending cycle waxes and businesses build capacity, high profits flow to almost anyone in the sector. Yet the inevitable waning the follows can destroy the profits of even industry leaders. The tremendous oversupply of communications bandwidth that built up over the course of the last technology boom is only now being fully utilized. Key industry figures see the new media trend toward serving video over the Internet as a sufficiently bandwidth intensive offering to justify building out a new generation of infrastructure.

Private equity players typically aren't investing solely to build upon the businesses they purchase. Avaya's relatively unleveraged balance sheet offers any buyer willing to use significant debt a guaranteed profit.

Like in the case of many other deals initiated by private equity firms, investors in Avaya are concerned that Silver Lake and TPG Capital are underpaying for the company, so the deal has a clause that allows Avaya to solicit competing proposals for the next fifty days.

While there is no evidence of collusion among private equity firms to avoid bidding wars and potentially save billions, even a highly informal understanding to avoid such risky bidding would serve the interests of private equity very well indeed.