June 5 (Bloomberg) -- Avaya Inc. agreed to be acquired by Silver Lake Partners and TPG Inc. for $8.2 billion in the largest leveraged buyout of a computer-networking company.

Investors will receive $17.50 a share, Basking Ridge, New Jersey-based Avaya said in a statement last night. That's 4.7 percent more than yesterday's closing price and 28 percent more than the price before speculation about a purchase surfaced on May 29.

The deal gives the firms the world's biggest maker of corporate phone network equipment, helping them go head to head with Cisco Systems Inc. in the $5 billion market for Internet- based systems. The purchase also marks the latest foray by buyout firms into technology and communications, following bids last month for Acxiom Corp., Alltel Corp. and CDW Corp.

``Private equity will probably make it a stronger organization,'' said Troy Jensen, an analyst at Piper Jaffray & Co. in Minneapolis, who rates Avaya's shares ``outperform.'' ``From a shareholder perspective, it's definitely a good move.''

The agreement allows Avaya to seek other bids for the next 50 days. The deal probably will close in the fall, Avaya said, without being more specific.

Shares of Avaya rose 31 cents, or 1.9 percent, to $17.03 at 4:02 p.m. in New York Stock Exchange composite trading. They have jumped 22 percent this year. The stock rose 15 percent on May 29 after the Wall Street Journal reported Avaya was in talks with Silver Lake.

Options Trading

Trading in options to buy Avaya shares surged last month, suggesting possible speculation that a buyout agreement was forthcoming. Call-option volume jumped to a record a week ago. Volume has exceeded 14,000 six times since May began, including a fresh all-time high today of 60,553 as of 4 p.m. in New York. Last year, 14,000 contracts was breached only once.

Takeover speculation began building last month when Merrill Lynch & Co. analyst Tal Liani said Avaya would be a ``perfect'' buyout candidate because of its improving cash flow and profit margin. The company then canceled an analysts' conference, and on May 29 the Journal reported the Silver Lake talks.

``That's when it really came to the spotlight,'' said William Choi, an analyst at Jefferies & Co. in New York, who rates Avaya shares ``hold.''

He said Nortel Networks Corp., North America's largest maker of phone gear, was involved in talks with Avaya in early May. Nortel spokesman Jay Barta declined to comment.

Avaya's History

Avaya first sold shares to the public in September 2000, after its spinoff from Lucent Technologies Inc., which wanted to focus on its fiber-optic and Internet-equipment business. The shares peaked that month and then tumbled as the technology bubble burst. The company lost 95 percent of its market value before hitting bottom in August 2002.

TPG, formerly Texas Pacific Group, was founded in 1992 by David Bonderman, 64, James Coulter, 47, and Bill Price, 51. The Fort Worth, Texas-based firm raised $15 billion last year.

TPG and Silver Lake bought Sabre Holdings Inc., the owner of tourism Web site Travelocity.com, this year for $4.4 billion. They also were part of the group that bought financial software and services provider SunGard Data Systems Inc. in July 2005 for $11.3 billion.

Buyout firms globally have engaged in 1,008 deals this year valued at about $452 billion, according to Bloomberg data. The companies had a record $701.5 billion in deals last year.

Silver Lake, founded in 1999, is the largest buyout fund to focus on technology. The company disclosed plans in January to raise as much as $10 billion for a new fund.

Other Bids

Acxiom, a computer and database services provider, said May 16 it's being bought by Silver Lake and ValueAct Capital Partners LP for about $2.24 billion. Alltel, the fifth-biggest U.S. wireless service, agreed May 21 to be bought by TPG and Goldman Sachs Group Inc. for $27.5 billion. Madison Dearborn Partners LLC agreed on May 30 to buy computer reseller CDW for $7.3 billion.

Avaya generated $205 million in operating cash in the fiscal second quarter and had cash and equivalents totaling $829 million at the end of March. Another attractive quality is that the company is debt free, Liani said.

The acquisition may allow Avaya to lift its operating margin, or profit excluding production and overhead expenses, to 10 percent from 7 percent by cutting costs and focusing on newer products, UBS AG analyst Long Jiang wrote in a report.

Avaya regained the top spot in the Web-based corporate phone-equipment market in the first quarter with 25.3 percent of sales, compared with Cisco's 25.2 percent. Second-quarter profit soared 50 percent to $38 million, or 8 cents a share, after severance costs dwindled, the company said in April. Sales increased 4.5 percent to $1.29 billion.

Slower Growth

Avaya's profit and revenue have grown more slowly than at San Jose, California-based Cisco, which entered the phone- equipment market eight years ago. Unlike Cisco, Avaya is saddled with older, traditional phone systems, which have seen declining sales as customers upgrade to faster Web equipment.

Donald Peterson led Avaya through the IPO and held the position of chief executive officer until he was replaced last July by Louis D'Ambrosio as part of a management shake-up. D'Ambrosio joined the company in December 2002 after 16 years at International Business Machines Corp.

Credit Suisse advised Avaya and its board on the deal, with Weil, Gotshal & Manges LLP as Avaya's law firm and Skadden, Arps, Slate, Meagher & Flom LLP as the board's legal adviser. Citigroup and Morgan Stanley advised the buyout firms, and will provide debt financing for the transaction, along with JPMorgan. Ropes & Gray is the legal adviser to Silver Lake and TPG.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

Last Updated: June 5, 2007 16:09 EDT