What happened

Shares of Avaya Holdings (NYSE:AVYA) and RingCentral (NYSE:RNG) both traded up nearly 25% on Friday morning after the two telecom companies announced a broad strategic partnership. The deal is likely not exactly what some Avaya shareholders were hoping for, but it should give both companies competitive advantages over going it alone.

So what

Under the terms of the agreement, Avaya, one of the largest providers of office communications systems, will use RingCentral's cloud technology to run future telecom systems. RingCentral as part of the deal will pay Avaya $375 million in advance sales commissions and licensing rights, as well as invest $125 million in a preferred equity investment that would amount to a 6% stake in Avaya if converted to common stock.

An office phone system sitting on a desk.

Image source: Getty Images.

The deal gives Avaya access to additional cash to be used to pay down $250 million of its more than $3 billion in debt and to help fund a new $500 million share repurchase. RingCentral meanwhile gets access to Avaya's 100 million customers spread over 180 countries.

"This strategic partnership leverages the respective strengths of Avaya and RingCentral to provide a definitive differentiated solution," RingCentral founder and CEO Vlad Shmunis said in a statement.

Now what

It's easy to see why RingCentral investors are excited by this agreement. RingCentral is in a race against tech heavyweights including Cisco Systems and Microsoft to try to modernize office communications systems, and partnering with Avaya and its massive installed base is a huge leg up for the upstart in that battle.

Avaya was at risk of losing those customers without a strong cloud offering, so the RingCentral agreement is a boost for that company as well. But Avaya shareholders have less reason to cheer. Even with the Thursday gains, the stock is still down nearly 8% over the last month. The RingCentral agreement all but ends speculation that the company will be acquired, eliminating one of the key factors supporting the stock in recent months.

Instead of a potential exit via a cash deal, Avaya still faces the prospect of competing against tech giants in a heated market. At least the company now has a strong partner to help it in that effort.