Avaya begins life as leader in office telephone systems

AP Don Peterson is the president and CEO of newly-formed Avaya Communications, a spinoff company of Lucent Technologies.

NEW YORK – Ma Bell is now a grandma.

This weekend, exactly four years after AT&T gave birth to Lucent Technologies with the spinoff of its communications equipment business, a third generation was born as Lucent officially spun off the part that makes office telephone systems, creating an independent company named Avaya Communications.

Much like Lucent and the seven Baby Bells created in the 1984 breakup of AT&T's local phone monopoly, the newest member of the clan is hardly a baby of a company.

Avaya begins life as a publicly traded company with 30,000 employees, nearly 1 million customers in 90 countries, and about $7.5 billion in annual revenue – large enough for Standard & Poor's to grant immediate membership in the S&P 500 index of the biggest U.S. companies.

And since Lucent is the nation's most widely owned stock with about 5.3 million shareholders, nearly all of whom are getting Avaya stock as a special dividend, Avaya instantly becomes the second most widely held stock with about 5 million shareowners, including 3 million individual investors.

Despite the lavish birthright, Avaya is being cast into rough circumstances that could mean an inauspicious start rather than a charmed existence. After all, there's a reason why Lucent chose to shed Avaya as part of a plan to rejuvenate a sluggish bottom line.

Avaya is born a leader in what's become a very stagnant market. Last week, a research firm named The Phillips Group reported that shipments of new corporate phone systems dropped 16.2 percent in the second quarter compared with the same period in 1999 – the first significant drop since 1993.

"The characterization Lucent made of us being slower growth vs. other things in portfolio was absolutely true. We were also lower [profit] margin," said Don Peterson, the former chief financial officer for Lucent chosen to be president and chief executive for Avaya.

"Our business right now is larger in slower growing segments. But that doesn't define the opportunities," said Mr. Peterson, pointing to faster growing parts of Avaya such as the unit that produces software for customer calling centers and for unifying office communications systems such as voice mail and e-mail.

Avaya's target addressable market is estimated to grow from $182 billion in 1999 to $333 billion in 2003, or an average of 16 percent a year, according to a recent report by George Kelly, an industry analyst for Morgan Stanley Dean Witter.

But while the phone system portion of that pie is seen growing only about 1 percent a year over that stretch, the unified messaging business is projected to grow 71.5 percent a year; the call center business, 30 percent a year, the report said.

Although Avaya is the top seller of phone systems in the United States, and the world's top supplier of call center and voice-messaging systems, the overall company only has a 4 percent share in all its markets combined.

"We have a terrific opportunity to participate in that growth and take some share away from other people, and we don't have to do that in an enormous way," Mr. Peterson said. "If our market share goes from 4 percent to 6 percent as we grow with the market, that's a tremendous market share."

But perhaps the most important task facing the new company will be an all-out marketing assault to forge a new brand name and corporate identity. The campaign, budgeted at $50 million over the next nine months, was launched last month with high-profile TV commercials during the U.S. Open tennis tourney and Monday Night Football.