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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

by qwrusz 10y ago

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 10y ago
"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.
- dade_ 10y ago
  They thought they were going to be able to do the quick cost cut and then buy another company, in this case Nortel, and then flip it is an IPO. They actually made a mess of the company, then 2008 happened and then made a bigger mess with the Nortel acquisition (strategically made no sense, paid way too much and then botched the integration). The part of the Nortel business that Avaya bought was actually profitable at the time. Epic cluster.
- qwrusz 10y ago
  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-buyout-went-wrong-1482321602 http://www.wsj.com/articles/avaya-how-an-8-billion-tech-buyo...
  - keytapper 10y ago
    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 10y ago
      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&CIK=0001116521&owner=exclude&count=40&hidefilings=0 https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&C... 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-said-to-meet-creditors-as-it-wrangles-6-billion-debt-load https://www.bloomberg.com/news/articles/2016-06-08/avaya-sai... 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/episode-647-the-benefits-of-bankruptcy http://www.npr.org/sections/money/2015/09/05/437628996/episo... 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.
jjoonathan 10y ago
Yeah, I see maneuvers of this sort as top management's equivalent to grabbing computer monitors, chairs, and coffee machines on their way out the door. The "PE turnaround" story provides a fig leaf to cover the violation of fiduciary duty, letting management + PE firm get away scot-free with stealing the liquidation money. Admittedly this opinion of mine is based on propaganda from the 2008 election cycle . If it's fundamentally flawed, I'd appreciate if someone would take the time to CMV.
bogomipz 10y ago
I agree, looking at this statement it sounds like this is a result of private equity loading the company up with debt. It sounds like problems are in the debt servicing post buyout. >"The Santa Clara, California-based company has been burdened by debt stemming from an $8.2 billion buyout in 2007 by private equity firms Silver Lake Partners LP and TPG Capital LP, with $600 million coming due in October. Interest expense of more than $400 million a year has been pushing Avaya into losses."
deleted 10y ago
[deleted]

by qwrusz 10y ago

keytapper 10y ago

"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.

dade_ 10y ago
They thought they were going to be able to do the quick cost cut and then buy another company, in this case Nortel, and then flip it is an IPO. They actually made a mess of the company, then 2008 happened and then made a bigger mess with the Nortel acquisition (strategically made no sense, paid way too much and then botched the integration). The part of the Nortel business that Avaya bought was actually profitable at the time. Epic cluster.
qwrusz 10y ago
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-buyout-went-wrong-1482321602 http://www.wsj.com/articles/avaya-how-an-8-billion-tech-buyo...
- keytapper 10y ago
  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 10y ago
    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&CIK=0001116521&owner=exclude&count=40&hidefilings=0 https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&C... 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-said-to-meet-creditors-as-it-wrangles-6-billion-debt-load https://www.bloomberg.com/news/articles/2016-06-08/avaya-sai... 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/episode-647-the-benefits-of-bankruptcy http://www.npr.org/sections/money/2015/09/05/437628996/episo... 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.

jjoonathan 10y ago

Yeah, I see maneuvers of this sort as top management's equivalent to grabbing computer monitors, chairs, and coffee machines on their way out the door. The "PE turnaround" story provides a fig leaf to cover the violation of fiduciary duty, letting management + PE firm get away scot-free with stealing the liquidation money. Admittedly this opinion of mine is based on propaganda from the 2008 election cycle . If it's fundamentally flawed, I'd appreciate if someone would take the time to CMV.

bogomipz 10y ago

I agree, looking at this statement it sounds like this is a result of private equity loading the company up with debt. It sounds like problems are in the debt servicing post buyout. >"The Santa Clara, California-based company has been burdened by debt stemming from an $8.2 billion buyout in 2007 by private equity firms Silver Lake Partners LP and TPG Capital LP, with $600 million coming due in October. Interest expense of more than $400 million a year has been pushing Avaya into losses."

deleted 10y ago

[deleted]