
Telecommunications company Avaya files for bankruptcy - doppp
http://www.reuters.com/article/us-avaya-bankruptcy-idUSKBN1532JY
======
qwrusz
Not to take away from challenges of the legacy telecommunications industry
right now, but this article slides in the private equity LBO part of Avaya's
story at the very end - and then only hints at what happened here.

I hope the pensioners and benefits obligations get paid the money they are
owed ASAP, because this is a classic story of private equity (Silver and TPG)
financially engineering a cash-siphon from a dying dinosaur and then "phoning
it in" when it came to the manage out/re-price of new risk.

I don't have a problem with mega private equity and I can see some kool-aid
drinkers saying "any acquisition made in October 2007 (the technical peak of
the pre-crisis market) was going to have a tough time working out as played".
But this was a deal designed to fail from the start.

 _Basically the private equity stunt here was: find a company that has $100,
take $99 of it, use the company 's last $1 to buy a lottery ticket, try to
convince other investors that $1 ticket is a winner. They failed huge here._

~~~
keytapper
"But this was a deal designed to fail from the start."

Can you elaborate on this further? I just made a comment earlier about how
Avaya ended up in this situation and I have had a feeling, based on how the
last few years have played out, that you might be right: I just dont
understand how the owners could have run the company the way they did and make
out with a profit.

~~~
qwrusz
What would you like to know? I read your comment and I think you pretty much
get the gist of it, but if you have q's about how private equity (PE) works in
this situation I'm happy to try to answer.

As for this deal. First it was 10+ years so feel free to call bullshit on my
memory but it felt like amateur hours as if SL/TPG let their new MBA hires run
it or people just screwed up when structuring the deal and unsurprisingly it's
been a disaster ever since. Some examples of what I mean:

 _TL;DR buying a knowingly bad business, buying it at auction for a 28%
premium, overloading it with clearly too much debt (even by risk-lovers
standards), showing little commitment as owners to planning /doing the hands
on operations work needed to fix/change/revive a mature obsolescing tech
company, nor put in a management team that seemed serious about it either._

It appears SL/TPG saw the prospects for Avaya were weak and did the deal
anyway[1]. In case you don't have access to WSJ, article talks about TPG
viewing Avaya as a "buggy-whip business" at risk of being outmoded.

That's not so bad on its own. Obsolescing/dying "buggy-whip businesses" are
just a reality of the business world. Such companies can still have value and
potential. But what's odd is SL/TPG not only stayed in the deal but they
bought in at a premium on auction. Meaning they had to fight against other
buyers to win the deal and then they paid a premium of ~28% for it. OK
guys...Auctions are a joke of a way to buy any business to begin with and such
auction deals deserve the little to no respect they get in the PE industry.

(side note: This inevitable obsolescence in a business model is especially
true in the tech space lately where the moment you launch a startup or
introduce a new product the process of it becoming outdated has already
started. All tech companies, big or bedroom, worry about keeping up with the
next tech wave and there is no formula to avoid being a one-hit wonder. Of
course some companies are able to hang on longer and stay big longer than
others (ie "the by luck or by fuck clause" also known as the SV/DC two-step),
but anyone who thinks the big FANGs of today will for sure be around in 10
years should read more tech industry history. Every tech business is dying
just some faster than others).

As for the Avaya debt. LBO's need debt and debt is not necessarily bad when it
comes to buying companies. The analogy for LBO debt is often that it's like
buying a house. I guess in the Avaya case it's maybe like a house in Detroit.
But if you have a $1MM and want to buy a house it may be better not to use the
whole $1Million on the house. Put down $100k and take a $900k mortgage from a
bank. Put your other $900k into other investments. At the end of it one should
hopefully be better off vs. putting all your eggs in one basket. So while debt
to buy companies can be a good idea in theory it doesn't always work out due
to just chance and also because the investment industry has a small but news-
worthy population of criminals and fucking idiots.

In the case of Avaya it was clear as day they used too much debt. Everyone
could see it and there were journalists/articles where the high debt issue was
brought up with Avaya management. I don't know if it was negligence or malice
or what.

If things don't go well in an LBO and the company has to file for bankruptcy
the bondholders lose. But that's not so bad, the bondholders should have known
the risks of the investment going in and they were paid for that risk. Don't
cry for them.

This reply has gotten long. I will add Kevin Kennedy has not done a good job
as CEO...Avaya is spending money on soccer stadium names and has fake filed
for IPO how many times then changed its mind? Also what really happened with
Louis D'Ambrosio? He leaves suddenly due to medical reasons then went to be
CEO of Sears a few years later. SL/TPG put Charles Giancarlo in as a
replacement who lasted a year with them?

Lastly, Private Equity and LBOs have the potential to be good for companies
and investors and employees. Businesses die and if someone sees a chance to
make some money trying to revive it or wants to get paid to dismantle it,
that's ok. But this should be done _primum non nocere_ from day 1. This
includes accurately telling employees and future investors of the risks of
doing the turnaround and it should not be done with outstanding liabilities
owned to employee pension plans. Frankly, in my personal opinion Avaya has
been run so poorly over the last few years, with risks that did not make
sense, that a crime with lapse of fiduciary duty may have occurred.

[1] [http://www.wsj.com/articles/avaya-how-an-8-billion-tech-
buyo...](http://www.wsj.com/articles/avaya-how-an-8-billion-tech-buyout-went-
wrong-1482321602)

~~~
keytapper
Great, thanks for your response. You sounds like someone who is on au fait
with these kinds of deals so I'll ask you your opinion on who were the winners
and losers here.

So, presumably TPG lose what ever the initially put in now that it has hit the
wall. Does that mean that they will have lost money over the course of the
investment or would they have found a way to slowly extract money from the
quite reasonable revenue that Avaya was generating over the last 10 years?
Their only regret being that they werent able to offload the company before it
hit the wall. With the mortgage/LBO analogy: when the bank repossess the home
it is theirs to manage. By what process does the venture guys give up
ownership and wash their hands of the day to day operations?

Since this was a leveraged buyout presumably the big loser here would be who
ever holds the bonds that were created to fund the buyout and whatever else
debt the company holds. Is there anyway to know who they are and why they
thought it was a good idea to put their money into this? Are likely to end up
owners of this company after the bankruptcy is resolved?

I guess the employees will take a large hit here, layoffs all round and
whatnot.

The leadership members that were put in to run the place: do they typically
take any kind of a hit in scenarios like this? It seems common knowledge that
KK was getting paid serious compensation for his time but it looks like the
only downside for him is that he didnt get the big bonus for selling off the
company. Can we expect a clearout at the top or is this up to the new owners
who result from the chapter 11 process.

~~~
qwrusz
Honestly, I don't know enough details and the Chapter 11 process needs to play
out still, so I think it's to soon to really say who were the winners and
losers here. Also it depends how you want to define winners and losers. Well
the lawyers are the winners for sure, but as for other parties it is tbd.

As for info on where TPG and your debt holders stand, along with other details
on what the hell is going on, it should be mostly publicly available. SEC's
Edgar is where I would start to look and a multi-page google search session
should find other stray legal documents.

Here is your Edgar page: [https://www.sec.gov/cgi-bin/browse-
edgar?action=getcompany&C...](https://www.sec.gov/cgi-bin/browse-
edgar?action=getcompany&CIK=0001116521&owner=exclude&count=40&hidefilings=0)

Also here is a Bloomberg article from last year when the shit hit the fan
while eating spicy food from a dirty foodtruck, the article has some names of
who owned the debt and who represents them and what your bonds were trading at
(even back then it was already 28 cents on the dollar, Oy)

[https://www.bloomberg.com/news/articles/2016-06-08/avaya-
sai...](https://www.bloomberg.com/news/articles/2016-06-08/avaya-said-to-meet-
creditors-as-it-wrangles-6-billion-debt-load)

I don't know nor can I predict if there will be large layoffs. You work there,
so hopefully you know.

It should not "seem like common knowledge" how much KK is getting paid, it
should be common knowledge, this is publicly available information. Click on
that Edgar link above, the info is in there. Look at the 10-K forms the
company filed they disclose executive compensation.

Other questions like what will happen to leadership or how will ownership of
the company change or what assets may need to be sold, this is all part of the
Chapter 11 process.

Unfortunately, and despite popular opinion, _people on Wall St cannot predict
the future_ ;). I don't know why CNBC and WSJ keep asking investors and
economists what they think will happen, these shmuks have no fucking clue. So
my apologies, but I just don't know how this will play out. But Chapter 11 is
quite a public process so you can follow it as it happens.

If you are unfamiliar with how Chapter 11 works, the Planet Money radio
show/podcast did a story on Ch.11 that was pretty good. Here it is:
[http://www.npr.org/sections/money/2015/09/05/437628996/episo...](http://www.npr.org/sections/money/2015/09/05/437628996/episode-647-the-
benefits-of-bankruptcy)

One more thing on the winners and losers. Sometimes a company can go down and
there are no big winners or big losers. Not by how I would define a loser
here. I am sure TPG and Avaya bondholders wished things had turned out better
on this investment. But they made an active investment decision, in a risky
company, as part of a diversified portfolio of multiple bets similar (well
hopefully). The portfolio overall also hopefully isn't losing money even when
one of the deals turns out to be a dud. Companies can go down even when giving
a 100% honest effort to improve it. Look at VCs and startups, some/most
startups in the VC's portfolio inevitably fail, are these companies and their
VCs losers? If people are fully informed on the risk and rewards, and nothing
was taken away, then the founders, employees and investors knew they were
taking a risk when they signed up.

My main concern when I read news stories like this is if people were lied to,
or misled or company directors & officers did not act in good faith while
making decisions when running the company. Being dumb still not a crime on its
own. But if a company's D&O put their employees pensions on the line while
enriching themselves, or if management mislead employees and small investors
about the health of the company/their efforts to fix the company's problems
while really planning their own exit behind the scenes - that's fucking
disgusting and it may be a crime (and if it was a crime send their asses to
jail plus a lawsuit to clawback their BS gains).

I don't know how this will play out but if I worked there I would for sure be
looking for another job asap as part of the uncertainty of who, what, where
over the next few weeks in Ch.11. Good luck.

------
keytapper
I have been working at avaya for the last couple years and I have been
scratching my head trying to understand how this company works and how it got
into this situation. On one hand its a company thats hasn't made a profit in
10 years but on the other it takes in a billion every quarter. When you look
at the numbers it turns out it is paying tens of millions to service the
interest on its massive debt... it would be quite profitable if it was not for
this. So where did the debt come from? Most of it seems to have come from the
leveraged buyout it underwent 10 years back. So now they file for chapter 11
bankruptcy but who is getting burned here? Anyone who bought an avaya bond
will lose out but what about the private equity company that owns the place?
The way the company was allowed to grow its debt seems like they just didnt
care as if it wasnt going to hurt them when bankruptcy finally beckons.

~~~
xenadu02
This is classic Wall Street private equity behavior. Use borrowed money to buy
the company, loot the place, and flip it. It's pure parasitic behavior but not
illegal.

I would advise anyone working at a company acquired by private equity to bail
out ASAP. It is just a matter of time before you get screwed. Especially don't
get left with a bunch of company stock.

I do wonder why creditors keep funding these PE deals and why anyone
participates in their share offerings. You're asking to get taken.

~~~
keytapper
Here is where I am struggling with... did the venture guys actually make money
in this case or did they make such a balls of it that they actually lost
significant amounts of their own money? Would they have 'Looted' the place by
paying out bonus to themselves as employees, could they have done this to such
an extent that over time it covered the initial capital they put in to take
Avaya over?

------
ogig
Off-topic tale: This brings back the memory of my first serious security job,
14 years ago or so. I had to pen test a big corporate-like network from the
inside so I was left with my laptop in a cubicle and the mission to own
something. I was young, inexperienced and a bit scared by the size of the
network. After some minutes I had a general map of the network, there were
some separated LANs and in the middle of them all it was this Avaya Cajun
managed thing. I ran some google queries and the second or third result showed
up a CVE, the Avaya firmware had a hidden admin account. Total time used,
10-15 mins.

I did not have to go any further, owning the Avaya was game over and got some
pats on the back from my employer and the clients. I had prepared a quite
extensive plan of action, been my first gig I had to show. The laptop was
loaded of tools, even some "cool" exploits but at the end it all came down to
a few nmap scans and a google query. I felt dissapointed. Also, after the pen
test I spent some (very) boring weeks documenting, inventorying, and
documenting again. It made me reconsider how deep I wanted to dive into
security audits.

------
sheraz
A friend of mine closed his company in 2013 and had a full avaya system with
40 phones and latest software that he could not even give away. Eventually
some kids from a local hackerspace came and hauled away the whole lot. They
were after the headsets and lcds.

~~~
tsomctl
I think this is pretty standard in the pbx business. The manufacturers don't
give out the complete documentation for the system, so it is useless without
paying money to your local dealer. Your local dealer doesn't want to help you
with a used system, he'd prefer to sell you a brand new one. Source: I work
for a dealer.

~~~
closeparen
I worked for a dealer. The configuration utility for Cisco PBXes (piece of
crap, by the way) can only be downloaded by certified Cisco partners. Or
BitTorrent.

~~~
voltagex_
Hell, even the firmware + config can only be downloaded that way. This means
if you got used phones that were configured for the proprietary SCCP, you
wouldn't be able to reconfigure them as SIP phones without paying the big
bucks. Yes, I know about Asterisk's chan_sccp.

------
dqv
They really went too hard with the whole proprietary software thing (but who
am I kidding, telecom _loves_ proprietary). Even though I know _very little_
about Avaya, my assumption every time I have tried to look them up is that
they are locked down and difficult to integrate with.

If I'm wrong, they sure as hell spent a lot of time leading me to believe I'm
right.

~~~
ismail
Not at all surprised.

"my assumption every time I have tried to look them up is that they are locked
down and difficult to integrate with."

Yep exactly this. We are working on a project where we have to integrate with
Avaya. It is a nightmare and ancient technology. Why would a company spend
tons of $ when you have just as good software in open source world (free
switch)

~~~
digi_owl
Ass coverage for the execs...

------
dv35z
A bit off-topic, but a call-out to those tech consultants who often work
remotely (using VOIP to interface with POTS):

At the previous tech company I worked at, we used Avaya VOIP phones (5000+
employees). The phones could be used at home (with a remote access point - RAP
- plugged into your router). One thing that always impressed me was just how
clear, crisp, and low-latency the audio was for VOIP. I'd pick up the handset
and the dial-tone was immediately there; while on conference calls, I could
easily interject comments (whereas with Skype, there is always an annoying
delay). While working at this company, I would literally bring this big ol'
corporate deskphone with my while traveling (e.g. south america, London, etc),
and it was great having a perfect call connection anywhere there is decent
internet.

My question is - for those folks who work remotely 100% (or often): Have you
found a VOIP phone solution that really works well for you? I bough an Ooma
handset, and I'm sorry to say that the audio is still clouded, muffled, and
has latency. Plus, the handset (the home/residential one) just feels... flaky.
Without having much experience with other VOIP phone systems, I'm really
looking for a solid corporate desk phone (handset, but also very clear remote
headset) - it's got to be as good as an in-office phone, interface with POTS,
and also be portable for travel. I do a lot of consulting, and am on phone
calls sometimes 4-5+ hours a day, so it'd be great to have a comfortable
powerful solution that can handle this.

Would love to hear anyone's thoughts and experience on this. My Ooma purchase
was an bit of a costly experiment...

~~~
Periodic
I'm surprised how much, as consumers, people will put up with in terms of bad
audio. I think cell phones really helped lower the bar when the connections
were bad but the mobility was unrivaled. I used to hate calling someone's cell
phone because the land-line was generally crystal clear and responsive.

Granted, things have improved a lot over the last 10 years, both in cell
phones and internet calling. However, video conferencing still seems pretty
obsessed with figuring out a way to get high definition video and both audio
quality (from the connection and the equipment) and latency haven't improved
significantly for major video conferencing solutions.

~~~
yardie
Mobile audio is awful because we are oversubscribed. My first mobile was a
CDMA PCS phone. My first call on it was for a date. My date assumed I was
calling from home on a land line. I was at her front door. The audio was so
clean it was indistinguishable from a landline.

Later on, as CDMA phones grew in popularity, the multiplexing grew and the
bandwidth shrank. Also codecs got more efficient by flattening the audio. All
the atmosphere is stripped from the audio and voice calls got very sterile.

~~~
Spooky23
That's the beauty of FaceTime Audio. Awesome quality, as long as you aren't
driving. Unfortunately, only ,y wife and I seem to use it!

~~~
yardie
I use FT Audio and whatsapp as well. FT calls are answerable right away while
Whatsapp calls have a whole process: swipe, unlock, find app, open app. By the
time I get in my Whatsapp caller has given up. 10 seconds later they'll make a
normal cellphone call.

------
revelation
They took a huge loan, bought the company and funneled its "profits" to the
loan and now it's bankrupt? How is that legal?

~~~
jessaustin
That is the basis of the private equity industry. Sometimes there's more
cashflow than they expected so the firm doesn't go belly-up before they can
peddle it, but that's not because PE dudes are any good at running a business.
It's just as common to get less cashflow than they expected, and have the
whole thing collapse without paying them.

In a previous life I got a close-up view of Carlyle attempting this with a
former Verizon business, only to discover that Verizon can put short pants on
crooked business execs. That office tower was stacked to the ceilings with
deadwood. Equal parts fascinating and horrifying.

~~~
smcl
"... only to discover that Verizon can put short pants on crooked business
execs"

This phrase interests me - what does it mean? Like they can dress them down,
or make them look foolish?

~~~
jessaustin
It means that compared to Verizon crooked execs, Carlyle crooked execs were
like children, who were new to the game of being crooked executives.
(Traditionally it was children who wore short pants.)

~~~
smcl
Wow ok, thanks :) I hadn't considered that

------
funkdobiest
So does this mean our company will stop forcing this Avaya plugin into all the
browsers? Just hopeful thinking. It has caused many hours of troubleshooting
as it injects it's code into every page.

------
fenesiistvan
I can't understand till today how they (and others) are capably to sell PBX
hardware when there are free and low cost software alternatives which runs on
common x86 hardware.

FreePBX for Linux ([https://www.freepbx.org/](https://www.freepbx.org/)) or
MizuSwitch for Windows ([https://www.mizu-
voip.com/Software/VoIPServer/FreeSoftswitch...](https://www.mizu-
voip.com/Software/VoIPServer/FreeSoftswitch.aspx)) are very good free
alternatives which can be managed also by non-technical people with zero
telecom experience. And there are a good support and a lot of modules for both
which can be purchased on low cost, not comparable to Avaya pricing.

~~~
cstrat
They have a pretty good name in contact centre technology.

I think the bigger shift is that people don't need desk phones anymore. The
move to mobile is killing the need for fancy PBX gear in business.

~~~
rpd9803
I don't think many businesses are quite ready for this, but a CTO can dream...

~~~
kimi
Some are. The problem is that what is WebRTC depends on Google's whims of the
day - so your browsers update and all of a sudden your agents can't work
anymore.

------
joncp
This has been coming for a long time. First, AT&T spun off their less
profitable stuff into Lucent, and then Lucent spun off their dog investments
into Avaya. It's all part of the plan.

