Avaya Calling on the Net

Telecom equipment maker Avaya (NYSE: AV  ) paid a whopping 86.5% premium for the shares of Ubiquity Software, which is listed on the AIM Market of the London Stock Exchange. This deal, costing about $144 million, will move Avaya further into Internet-based communications -- but is probably not enough to move the needle on growth.

Founded in 1993, Ubiquity develops session initiation protocol (SIP) communications software. Basically, this allows telecom carriers to use Internet-based technologies to offer communications services such as voice, video, and data. What's more, SIP tends to be a lower-cost approach.

The problem? Well, the sales cycle is grueling. For example, late last year, Ubiquity announced that it would show "significantly" lower revenues for the fourth quarter because several contracts did not get signed.

Also, it should be no surprise that Ubiquity has high customer concentration. About two-thirds of its revenues come from BT (NYSE: BT  ) and Global Crossing (Nasdaq: GLBC  ) .

Despite all this, Avaya is paying a high price for the company -- roughly 9 times revenues. Then again, Avaya is likely to monetize the acquired technology through its extensive customer footprint. During the past year, the company has generated roughly $4.9 billion in revenues and has more than 90% of the Fortune 500 as customers.

All in all, Avaya's purchase of Ubiquity makes sense to me. Internet-based communication is growing worldwide, and this should continue for some time.

Yet the fact remains that Avaya's competition is also bolstering its technologies. The company has rivals in Cisco (NYSE: CSCO  ) and Nortel (NYSE: NT  ) , which has a big distribution deal with Microsoft (Nasdaq: MSFT  ) . In other words, Avaya will probably need to do some more deal-making to boost growth.

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Fool contributor Tom Taulli does not own shares mentioned in this article. He is currently ranked 1,623 out of 19,864 in Motley Fool CAPS. The Fool has a disclosure policy.


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