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For the price of $8.2B, Silver Lake and TPG Capital, formerly known as Texas Pacific Group, have offered to take Avaya private. Both Silver Lake and TPG are private equity firms. This is the largest transaction in the enterprise networking and communications space undertaken by a private equity firm. My take is that this is positive development for Avaya´s shareholders, employees and most importantly its customers.

When the rumors started to spread throughout the NY Times and WSJ over the Memorial Day weekend that Avaya was up for sale, Cisco and Nortel were mentioned as potential buyers. In fact, this deal will not close for at least 50 days, leaving the door open for others to top the private equity offer and buy Avaya.

I never did think that Nortel would or could step up to buy Avaya because it simply did not make sense. The financials simply could not work for Nortel, which carries a market cap of only $11.5B. Most importantly, the product overlap is huge and integrating the two companies is well beyond the resources available to the Nortel executive staff at the moment. They have enough to deal with now that Microsoft is their taskmaster. This would have been Cisco´s best-case scenario. Since Avaya and Nortel would have taken a year plus to figure out and implement a rationalization plan, Cisco would have used that time for winning deals so customers would not have to endure product end-of-life risk and uncertainly.

I did think that an Avaya and Cisco combination could work. Yes, there is overlap on the IP telephony space, but Cisco is often knocked because they do not have a backward migration offering. Also, Cisco would have picked up a large and loyal customer base as well as being provided with entry into the high-end contact center market. Perhaps Cisco is not sold on communications-enabled business processes, which is Avaya´s future as it now has the environment to fully develop into a software and services concern.

So what do Avaya´s stakeholders get from this transaction? Louis J. D´Ambrosio, Avaya´s President and CEO has been busy resetting the culture button at Avaya while surrounding himself with an experienced executive management team from the software industry. Mr. D´Ambrosio has added Jocelyne J. Attal, from IBM´s Websphere, as the Chief Marketing Officer; Charlie Ill as Senior VP Global Sales, formerly President of Sales at BEA Systems; Stuart Wells from Sun Microsystems, is Senior VP, Global Communications Solutions running the entire Avaya product offering portfolio. The recruitment of software executives into Avaya is at all levels, not just at the executive management ranks.

These executive management additions are part of a concerted strategy to turn Avaya into a software and services concern. As a private company Avaya will now have the flexibility to implement this long-standing plan. Out from under the quarterly scrutiny of the financial markets, Avaya can change compensation plans, rationalize product lines away from TDM toward IP telephony, invest more heavily in software and service development without the unpopular task of warning Wall Street of expectation changes. It´s difficult-to-impossible to transition a public company without being heavily penalized with stock sell-offs, which bring many firms into a downward cycle. Resetting Wall Street expectations usually results in downward stock pressure, which impacts morale and makes it difficult to recruit and retain top talent and provides competitors with a vulnerability to exploit. Avaya will have the opportunity to implement its software and services plan without these distractions.

The entry of financial sponsors into this industry segment is not new. Francisco Partners is rumored to be behind the Inter-Tel/Mitel deal while Vector Capital is rumored to be making a late Inter-Tel offer. The Gores Group purchased Enterasys. Financial sponsors usually have one of three targets as they view transactions. Financial reasoning is one primary strategy where the company´s purchase price is weighted by the financial sponsor at a value that pays a premium to stakeholders today while reviewing the firm´s cash flow to service its new debt. The financial sponsor will proceed if the financials work and there is value to be gained in re-structuring the firm at a later date. The second type of transaction is to buy a company with bad management in order to fix the mistakes and turn the concern around. The third type of target is a vision purchase. The vision could be the financial sponsor´s or that of the company they plan to purchase. Silver Lake and TCG may have their own vision of the Avaya acquisition, which builds upon Avaya to accelerate industry consolidation. In short financial sponsors may believe that the enterprise networking and communications industry is broken in that we have too many competitors spending too many dollars on the same development, knocking on the same doors to sell the same solutions. Part of this industry consolidation effort may be to bifurcate technology and services, acquiring firms along those lines to eliminate industry redundancy and in the process create value which would be sold at profit.

It´s not clear what the intentions of Avaya´s financial sponsors are, but a large industry consolidation would take a few business cycles to sort through. In the short term there is no other way than to view this as a win for Avaya. Avaya´s customers do not have to worry about product end-of- life; in fact they will be rewarded by Avaya´s ability to further invest in the Avaya platform of Intelligent Communications without executive management distraction. Avaya´s shareholders receive a 30% gain on their stock holding investment while Avaya´s employees do not have the worry that accompanies a consolidation or re-structuring. Avaya´s new CEO Louis J. D´Ambrosio is proving that he can lead this company into becoming a software and services powerhouse.