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In light of the Wall Street Journal reporting that Nortel (NT) may be interested in buying Avaya (AV), UBS Securities said the possibility of a Nortel-Avaya deal “would be consistent with Nortel’s strategy of increasing focus on enterprise and professional services” but that it would involve high integration risks.

In a research report, UBS analyst Nikos Theosopoulos said buying Avaya would give Nortel 30% of the enterprise voice market, as well as more scale in the services business. He also believes it would be accretive based on a price of $16.50 a share and $200-million in operating synergies. “Synergy targets may be larger than $200-million but we take a conservative view given integration risk, large product overlap and large services component at Avaya”.

If Nortel is really interested in becoming a major player in the enterprise market, then there might be something to the speculation that it may be interested in buying Avaya. According to the Wall St. Journal, Nortel and Avaya were in discussions but couldn’t reached a deal after failing on two fronts: a price, and whether Nortel would use cash or stock. Avaya is now apparently the target the privaty-equity and strategic buyers looking to purchase all or part of the company.

The big question Nortel watchers need to ask is whether the company is ready and/or willing to make such as a big move. Despite the progress made by CEO Mike Zafirovski in restructuring Nortel, there is still plenty of more work to be done and operating costs to be reduced. An acquisition would definitely complicate the situation. The other question is whether Nortel has no choice but to make such a bold and aggressive move.

If Zafirovski is really serious about Nortel become a strong enterprise player AND wants Nortel to gain its status as a tier one supplier, it may have to do something as dramatic as some of its peers (e.g. Lucent-Alcatel (ALU), Siemens (SI), Nokia (NOK)). The last time Nortel made a multi-billion dollar enterprise acquisition, it bought Bay Networks in 1998 for $9.1-billion. For the most part, the deal was a disaster - not unlike many of the deals that Nortel made during the telecom boom. For more, check out this New York Times.

NT vs. AV 1-yr chart:

Source: Is Nortel Eyeing Avaya?