Avaya's consideration of a Chapter 11 bankruptcy filing exemplifies a growing trend in the tech sector right now: if you acquire a new company and that company suddenly becomes a massive financial weight without the competitiveness to relieve that debt, the asset may not be worth it.
In 2007, Avaya was purchased by an equity group called TPG for $8 billion. At the time, Avaya was a prominent force in the industry of corporate telecommunications. They had systems to help companies with their call centers. But then 2008 came around, and when the markets crashed, few companies were doing well. By the time TPG and Avaya recovered, other competitors had entered the corporate telecommunications market -- such as Cisco and Microsoft -- and Avaya never recovered.
It is now on the verge of a bankruptcy filing as it carries nearly $6 billion in debt.
This is a cautionary tale, and there are two lessons to learn here. Companies can't always predict the future, and sometimes that future includes a hazy financial picture. If the markets dramatically change or a company suddenly isn't competitive in the marketplace anymore, that can drastically hurt you, especially if you have acquired the suddenly-irrelevant company.
But the other lesson is a bit more hopeful. A business bankruptcy filing can help a company that is struggling to buy some time as it prepares an exit strategy or a transition into a new company that may look to purchase it.
Source: Wall Street Journal, "Avaya: How an $8 Billion Tech Buyout Went Wrong," Matt Jarzemsky and Marie Beaudette, Dec. 21, 2016