When the telecom sector cratered in 2002, the shares of equipment maker Avaya (NYSE:AV) hit $1.15 and the company's survival was in doubt. Since then, it has been able to recover and the stock is up to $17.12. Avaya is now attractive even to private equity firms, and has agreed to an $8.2 billion deal. The buyers include TPG and Silver Lake.
Just a couple of weeks ago, there was another biggie deal in the telecom sector. TPG Capital and Goldman Sachs (NYSE:GS) offered $27.5 billion for wireless operator Alltel (NYSE:AT).
What should we make of this sudden interest in telecom? Keep in mind that marquee private equity firms are able to hire topnotch analysts to identify developing industry trends. In the case of TPG, the firm has a long history of making prescient calls.
Looking at the telecom sector, a key growth driver is the explosion of data from instant messaging, email, voice over Internet protocol (VoIP), Web conferencing, and online video. Emerging markets such as China and India will need new telecom equipment.
Avaya is certainly positioned for these megatrends. The firm has about 3,500 patents, a global footprint, and strategic relationships with companies like IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), and Juniper Networks (NASDAQ:JNPR).
With such a franchise, might more bidders come to the table? It's possible. If you take a look at the merger agreement, there is a 50-day "go-shop" provision, and this means that Avaya can solicit more offers. Possible suitors include Nortel Networks (NYSE:NT) and Cisco (NASDAQ:CSCO). Yet Wall Street is still not convinced of the viability of other deals, since Avaya's stock price is selling at a discount to the $17.50 buyout offer.
I think the main takeaway is that the smart money players believe that public markets misunderstand the value of certain telecom assets and are willing to make big bets. So for Foolish investors, it's probably worth taking a serious look at the space.
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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. At the time of writing, he is ranked 1,900 out of 29,700 rated players in CAPS. The Fool has a disclosure policy.
