Avaya Files for Chapter 11

Telecommunications company Avaya today filed for Chapter 11 bankruptcy protection and began formal proceedings to restructure its balance sheet to better position itself for the future. The company's foreign affiliates are not included in the filing and will continue normal operations.

"We have conducted an extensive review of alternatives to address Avaya's capital structure, and we believe pursuing a restructuring through chapter 11 is the best path forward at this time," said Kevin Kennedy, CEO of Avaya, in a statement. "Reducing the company's current debt through the Chapter 11 process will best position all of Avaya's businesses for future success."

As part of Avaya's comprehensive assessment of options, Avaya had considered selling off some of its businesses, including its contact center business. After extensive evaluation, the company instead decided to focus on its debt structure and determined that a sale of the contact center business at this time would not maximize value for Avaya's customers or stakeholders.

"This is a critical step in our ongoing transformation to a successful software and services business. Avaya's current capital structure is over 10 years old and was put in place to support our business model as a hardware-focused company, which has evolved significantly since that time," Kennedy said.

Several of Avaya's competitors that are more advanced in the cloud arena than Avaya, were quick to point out that this has been an area of weakness for the company, which is based in Santa Clara, Calif.

"Avaya's bankruptcy news is a cautionary tale that reflects a bigger theme in the enterprise solutions space: Mobility is dramatically impacting business models. Legacy on-premises players in every industry are feeling pressure from the rapid growth and adoption of cloud solutions, and the enterprise communications market is no exception. Because of today's mobile and distributed workforce requirements, the move to the cloud is continuing to accelerate while on-premises systems vendors struggle to survive," said Vlad Shmunis, founder and CEO of RingCentral, in an email.

"Avaya's bankruptcy is a reflection of the industry shift from on-premises solutions to the cloud and the need to empower businesses with innovative solutions that provide a mobile-first, unified communication experience," added Praful Shah, senior vice president of strategy at RingCentral.

Dan Burkland, executive vice president of sales and service at fellow Avaya competitor Five9, sees Avaya's problems as stemming from somewhere else. "Avaya was unsuccessful in its attempt to carve out their call center offerings from their broader product suite," he says. 

But Kennedy was quick to point out that Avaya hopes to rebound.

"Our business is performing well, and we are confident that we can emerge from this process stronger than ever," he stated. "Pursuing restructuring through Chapter 11 will enable us to reduce Avaya's debt and interest expense while providing increased financial flexibility to further invest in innovation and growth to enhance our market-leading competitive position. Most importantly, we are keenly focused on minimizing disruption to our customers, partners, and employees and do not expect to experience any material disruptions during the Chapter 11 cases."

It can be done, and companies can even come back stronger after a Chapter 11 filing, several analysts noted, pointing to Aspect Software as an example. Aspect filed for Chapter 11 bankruptcy in March 2016 and emerged several months later in June as a much stronger organization.

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Posted February 16, 2017