As one of the biggest names in enterprise communications, it was a big shock to hear last year that Avaya might not make it into 2017. Well, we’re a quarter of the way through 2017 and Avaya still stands, albeit on shakier grounds than before.
We probably all know at this point that Avaya has recently filed for Chapter 11 bankruptcy protection. But just a few weeks ago, Avaya also announced the beginnings of their reorganization plan. However, with it being quite early in the process, the details aren’t finalized just yet — and everything will move pretty slowly.
But with a plan to “significantly reduce” pre-filing debt, we wanted to take a close look at what we know so far and what this means for both the present and future of Avaya. More importantly, we were curious to see how, if at all, this might impact any existing Avaya customers. We just recently saw Avaya launch their new Zang spaces solution, which many see as a compelling competitor — but the question remains: can business continue as usual, and can Avaya successfully manage such a large reorganization?
So starting back from the beginning — I wrote an article in November of 2016 highlighting the rough seas at Avaya. News that Avaya was considering Chapter 11 filing broke out over the Thanksgiving weekend.
Despite such a massive presence and being ranked #101 on Forbes America’s Largest Private Companies list, Avaya was facing a rather large debt that it simply could not overcome (and when I say ‘rather large’, I mean roughly $6 billion.) Breaking it down, we saw $600 million due by October 2017, as well as $5.3 billion for the 2018-2020 timeframe. This was all based on their own regulatory filing.
Hope wasn’t entirely lost, though, and the Wall Street Journal reported sources stated that Avaya could bring in as much as $4 billion in a potential sale. Granted, the amount is lower than $6 billion, but other creditors could potentially swap the company’s debt for partial ownership.
So now that we’re on the other side of the fence, how exactly did this all play out? First, we’ll take a look at exactly what Avaya is proposing for their reorganization before jumping in and attempting to dissect the jargon and marketing lingo.
So, on April 13th Avaya announced it had officially filed a Chapter 11 plan of reorganization. Filed with the United States Bankruptcy Court for the Southern District of New York, Avaya’s plan outlines what they see as “a path to significantly reduce Avaya’s pre-filing debt.” The main hopes and key points outlined in Avaya’s plan are going to evolve as the provider works towards “creditor consensus and confirmation by the Court,” but the main points are laid out as follows:
- Avaya’s pre-filing debt will be reduced by more than $4 billion.
- Avaya’s restructuring will be achieved through a debt-for-equity exchange, in which certain secured creditors would acquire 100 percent of reorganized Avaya’s equity.
- Avaya’s general unsecured creditors will share pro rata in a cash pool.
- Avaya will continue to honor and maintain its qualified U.S pension plans, which make up the vast majority of Avaya’s pension obligations, following its emergence from bankruptcy.
- Avaya will continue to honor and assume its two collective bargaining agreements and all related agreements.
Within their announcement, CEO of Avaya Kevin Kennedy of course included some hopeful insight surrounding the entire announcement and proposed plan:
“We are pleased to have filed the Plan, which is a crucial step forward in our effort to recapitalize Avaya’s balance sheet and create a stronger and healthier company that can create even more value for our customers,” said Kevin Kennedy, Chief Executive Officer of Avaya. “We look forward to working closely with all stakeholders over the coming weeks and months to refine the Plan and build consensus.”
More importantly, though, Kennedy made a very specific comment about Avaya’s short-term future:
“Our normal business operations are running well, and we continue to sign significant customer renewals and new customer contracts. In addition, the Company’s consolidated balance sheet now has more than $750 million in cash, reflecting DIP financing proceeds and positive cash flow from operations. We remain confident in our ability to maximize value for all of our stakeholders and to complete our balance sheet restructuring as soon as reasonably possible.”
The very beginning of this quote, I think, is what most are concerned about: how will business continue from here on out at Avaya? Well, according to the CEO, it’s business as usual and nothing has changed. But of course the CEO is going to say that — they don’t want to lose anymore revenue or cause their entire user base to jump ship.
So, What’s It All Mean?
In reality, only time will tell the end results of this whole process. We can’t really understand what’s going on at Avaya, or how this change will exactly impact existing customers. However, we can attempt to make sense of their proposed plan, and formulate an understanding of what this really means for end users.
Thus, the easiest way to sum up Avaya’s goals in plain English would be:
- Avaya plans to keep their doors open and the business operating as usual.
- Avaya of course hopes to emerge as a healthier company that can strengthen its position.
- Avaya hopes to cut about $4 billion in its outstanding pre-filing debt.
- Avaya is strongly set on the idea of reducing the strain and interruption on existing partners, clients, and users as much as possible.
- Avaya will also attempt to honor its pension promises for employees.
And it actually does seem like Avaya is managing to keep up normal business despite the entire process. In a great rundown put together by Steve Leaden on NoJitter, he noted that since their filing on January 19, Avaya has been kept fairly busy. In Leaden’s own words:
- “Availability of debtor-in-possession (DIP) financing — Avaya is able to draw on $725 million DIP financing, which it has said will provide more than adequate liquidity to support ongoing business operations during Chapter 11.
- Company wages approval — On March 20, the Chapter 11 judge approved the company’s wages motion, authorizing payment of wages, salaries, commissions, and reimbursable expenses in the ordinary course of business; continuation of employee benefits programs; and resumption of incentive programs. (The court had previously approved the motion as to certain wages, salaries, and benefits on an interim basis.)
- Planned sale of Avaya’s networking business — The next scheduled court date is mid-April (as I write this), with the transaction expected to conclude by June 30, which is the close of Avaya’s fiscal third-quarter 2017.”
Based on not only Avaya’s word but also their actions so far, it does seem as if business will continue as planned. With DIP financing, Avaya is able to keep its processes running and its lights on, and wages were authorized to keep employees paid (including benefits). Avaya is also still selling off its networking business. They’re shedding weight and moving forward.
But on top of this, as we saw back in February, Avaya continues to develop new products. In fact, they just recently announced the introduction of their new Zang cloud platform. So with everything falling into place — at least so far — should existing Avaya users and clients be worried? Well, just because the storm has calmed down for now doesn’t mean the winds won’t pick up again next month. With everything already moving to the Cloud, and so many competitors popping up — like Amazon’s new Connect Contact Center solution — maybe this is the right time to begin that shopping list.
Time to Switch?
Now, I’m a natural skeptic — but this news is worth taking with a grain of salt. As I said above, of course Avaya is going to make everything sound positive and under control. If they lose their existing client base because of an uncertain future, then they’re going to have a very difficult time staying afloat. So the goal is to keep existing users where they are so the plan has time to work itself out.
But is it worth sticking around just to hope things go right in the end? I’m not the first to point this out, but Avaya’s debt is pretty massive. Even Leaden wrote how “the company faces an uphill battle in getting out of debt,” and he doesn’t see the provider emerging out of Chapter 11 quickly. I think anyone could understand that $4 billion is a very, very big number. And despite the size and reach of Avaya, it will be a tough road ahead.
So I echo others in the sentiment that if your business is currently an Avaya client, now would probably be a good time to at least consider the option of migrating solutions. At the end of the day, we don’t know how Avaya will look on the other side of Chapter 11, nor do we know how long it will take for them to even emerge on the other side. The consistency is just too shaky to rely on for such an integral aspect of most businesses, communications and, support.
An Uncertain Future
Giving credit where it’s due, Avaya does seem to have a handle on the entire situation — at least for now. Of course, the keyword here is “seems”; nothing is certain and it could prove difficult to stay consistent throughout the entire process. When consistency in your business and services are key for your clients… well, then it could prove difficult to balance a long term plan with short term results.
Now, we’ll always recommend users switch to the Cloud or a Hosted PBX solution, or search for an alternative that can offer the same, or more, for less. At this point, if you aren’t already, it might be the prefect time to search around for alternatives. Migrations aren’t instant, and could be an annoying process in itself. But waiting until this all blows over could put your business in even hotter water than the annoying migration process. Avaya could very well come out of Chapter 11 stronger than ever, but for the sake of your business, it might not be worth sticking around to find out.