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Elliott Management, the activist hedge fund that has roiled the operations of tech companies like EMC, Citrix Systems and Juniper Networks over the past few years, is now turning its attention to two vendors in the communications space, Polycom and Mitel.
The firm on Oct. 8 disclosed that it has bought large stakes in both companies, and is urging the two to merge in hopes of creating a larger and more powerful player in the crowded unified communications and collaboration (UCC) market that is dominated by the likes of Cisco Systems and Microsoft. Elliott officials laid out their ideas in a letter to Polycom’s board of directors and CEO, Peter Leav.
“Elliott strongly believes a combination of mid-tier UCC vendors will create greater scale, significant synergies and a meaningful valuation uplift for stockholders,” Elliott officials said in the letter. “Elliott would be willing to provide financing for Polycom’s acquisition of targets in the space, something we have successfully done before.”
In the letter, Elliott officials said they have also told Mitel executives and board members of their views, noting that “Mitel is a good platform vehicle to roll up the sector and is also an attractive merger candidate for Polycom. … We believe that the ideal Consolidation Strategy begins with a Polycom/Mitel combination, whether those companies stay public or go private.”
Elliott has acquired a 6.6 percent stake in Polycom and a 6.3 percent stake in Mitel, with about a $100 million investment in each company. The hedge fund has invested in Mitel for several years, but significantly increased its stake in the company this year.
In a statement, Mitel officials said: “We welcome Elliott Associates’ interest and ongoing investment in Mitel. We have reviewed Elliott’s recent filings on schedule 13-D [filing with the Securities and Exchange Commission] and share their views as to consolidation opportunities in our industry. Mitel’s senior management has consistently discussed its intention to consolidate the market, and in recent years has proactively leveraged M&A activity to successfully deliver shareholder value. As always, we look forward to creating further value for all Mitel shareholders.”
Polycom executives in a statement said they and the board will meet with Elliott officials to talk about their ideas, but added they would not comment on the discussions. Elliott’s letter came a day after Polycom officials were in New York City for an event to mark the company’s 25th anniversary that included the rollout of several new video conferencing systems.
Elliott has developed a well-earned reputation as a tough investor in tech that buys a large stake in companies and then presses for changes with the goal of returning more money to shareholders. Riverbed Technology eventually was sold to equity firms in 2014 for $3.6 billion, and Juniper Networks that same year sold off its Junos Pulse security business and cut 6 percent of its workforce as part of a restructuring urged by Elliott.
Citrix in July announced President and CEO Mark Templeton will retire and that officials are reviewing the future of the company’s GoTo online collaboration products. In addition, an Elliott portfolio manager was named to the board and another independent member agreeable to Elliott would be added.
Elliott also has urged storage giant EMC to shed its 80 percent stake in VMware and to end its federation business model, in which the companies that EMC owns—including VMware, RSA (security), VCE (converged infrastructure) and Pivotal (big data analytics)—operate as separate, and at times competing, businesses but also offer integrated solutions. EMC CEO Joe Tucci has pushed back at the recommendations, and reportedly has considered other alternatives, including having VMware buy EMC.
Reports have surfaced this week that Dell is considering buying EMC.
Editor’s note: This story was updated to include the statement from Polycom officials.
Investor Elliott Urges Polycom, Mitel Merger
Regarding Polycom and Mitel, Elliott officials said they and other UCC vendors are in a “very difficult market” that has caused “Polycom’s stock to meaningfully underperform all relevant metrics over all relevant timeframes. … Maintaining the status quo strategy will perpetuate Polycom’s track record of underperformance and risk further shareholder value erosion.”
They noted that in the last two years, Polycom has made such moves as cutting expenses, buying back stock and changing management, but said those steps haven’t returned value to shareholders. They urged Polycom to undergo an immediate comprehensive review of its options. The options include merging with Mitel.
Mitel CEO Richard McBee, since taking over in 2011, has been aggressively moving the company toward cloud and mobile solutions, and has used acquisitions of companies like Aastra Technologies and Mavenir Systems to help with that effort. Last year, Mitel made a $574 million bid for rival ShoreTel, though ShoreTel board members never pursued the offer and it was withdrawn.
McBee has said many times that the UCC industry is set up for consolidation, and that his intent is to have Mitel be a buyer.
Zeus Kerravala, principal analyst with ZK Research, told eWEEK last month that the unified communications (UC) field consists of Cisco and Microsoft at the top, with a range of other vendors—such as Mitel, ShoreTel, Avaya, Unify and Nokia Networks (which is buying Alcatel-Lucent)—in the next tier. Cisco also is a player in video conferencing, where other competitors include Logitech’s Lifesize Communications business, Vidyo and Blue Jeans Network.
“There’s not enough revenue for all companies to win,” Kerravala said. “Vendors must be willing to put both feet into the new [cloud] world and embrace it, and not sacrifice the future for their legacy businesses.”
Elliott officials in their letter echoed that sentiment, saying that “we believe the space is ripe for consolidation—small competitors with low valuations and duplicative cost structures create the opportunity.”