As many in the industry had suspected might be necessary, Santa Clara, Calif.-based Avaya filed for Chapter 11 bankruptcy. The news came with a surprising twist though — the telecommunications provider said it would not sell its contact center business despite having tried to do so last year.

Technically speaking, Avaya's decision to turn to the protection of the bankruptcy code is because it is facing a debt load of $6.3 billion whose origins date back to its $8.2 billion buyout in 2007 by private equity firms Silver Lake Partners and TPG Capital. 

"Avaya's current capital structure is over 10 years old and was put in place to support our business model as a hardware-focused company, which has evolved significantly since that time," Avaya CEO Kevin Kennedy said. "Now, as a result of the terms of Avaya’s debt obligations and the upcoming debt maturities, we need to recapitalize the company."

One could posit another reason it found itself filing for relief in the US Bankruptcy Court for the Southern District of New York this week is because its corporate crown jewel, its contact center business, is too difficult to carve out as a stand alone entity.

A Failed Sale

To be fair, there were rumors in the media that Avaya was going to file for bankruptcy whether it sold its contact center business or not. In May 2016, Avaya announced it hired Goldman Sachs Group and Centerview Partners to explore strategic options including a sale. 

Clayton Dubilier & Rice emerged as a serious bidder for the unit, which sources told the media was valued at around $4 billion. The bid failed, again according to unnamed sources speaking to reporters, because the parties were unable to agree on terms.

What Avaya was trying to do was very difficult, says Dan Burkland, EVP of Sales and Services at Five9, which provides cloud-based contact center software. 

"It was trying to just sell the contact center software and keep the hardware and the rest of the software that operates the phone system," he told CMSWire. "The contact center functionality is inside of the PBX system," Burkland continues. "How do you negotiate who owns what, who supports what, in a business unit sale like that?"

When announcing the bankruptcy filing, Kennedy said the company had come to the conclusion that focusing on its debt structure was more important and that a sale of the contact center business at this time would not maximize value for Avaya’s customers and stakeholders. 

"Pursuing restructuring through chapter 11 will enable us to reduce Avaya’s debt and interest expense, while providing increased financial flexibility to further invest in innovation and growth to enhance our market-leading competitive position," he said.

The Move to the Cloud

There is a broader story about Avaya and its struggles, which is this: it is — at least in its original incarnation — on the wrong end of history's arc (at least the history of the telecom and software industry). Simply put, companies have been moving away from expensive on-premise systems to the cloud.

"We saw that same trend with CRM ten, fifteen years ago when Siebel began losing its base to Salesforce," Burkland said. “It has been happening with in the contact center space for the last few years.” 

Kennedy would disagree and indeed it is clear Avaya has been restructuring its orientation and product line to reflect the move to the cloud. But because it is a legacy company and many of its customers have invested heavily in the old-school infrastructure, the transition has been slow.

Like most chapter 11s, Avaya is seeking some breathing room to restructure its operations. It says that customers will see minimal disruption to services or support during this period. To that end it has secured Citibank's commitment for a $725 million debtor-in-possession financing facility, which, combined with Avaya’s cash from operations, should keep the company going.

"Our business is performing well, and we are confident that we can emerge from this process stronger than ever, as this path is a reflection of our debt structure, not the strength of our operations or business model," Kennedy said.