Mitel is buying Polycom in a $1.96 billion deal that officials for both vendors said will create a combined company that will be better able to compete with the likes of Cisco Systems and Microsoft in a rapidly changing enterprise communications and collaboration market.
The announcement of the deal April 15 comes after months of speculation following a suggestion by activist investor Elliott Management, which in October 2015 increased its stakes in both Mitel and Polycom and recommended the two explore a merger.
The deal will merge Mitel’s strengths in unified communications (UC)—with offerings for on-premises, mobile and cloud environments—with Polycom’s expertise in conferencing and video collaboration technologies. It will create a $2.5 billion company with about 7,700 employees and a solid presence in most of the global markets, with strengths in such areas as cloud communications, conference phones, and video and audio conferencing.
The new company will retain the Mitel name and continue to operate Polycom as a division with its own brand. Mitel CEO Rich McBee will remain in the position, with Mitel Chief Financial Officer Steve Spooner staying in that role. Polycom directors will take two seats on the Mitel board.
“It’s a good move for both,” Zeus Kerravala, principal analyst with ZK Research, told eWEEK. “Conceptually, it makes a lot of sense. If you look at the two businesses, they’re very complementary.”
During a conference call with analysts and journalists, McBee and Spooner said the deal continues Mitel’s efforts to become a larger player in the communications and collaboration market through both in-house development and outside acquisitions. McBee in the past has said that the space is ripe for consolidation and that Mitel would be one of those vendors doing the buying.
“We will be able to bring full, end-to-end collaboration solutions” to both customers and channel partners, Spooner said.
In addition, McBee stressed the need to retain the Polycom name.
“We will keep the Polycom brand,” the CEO said. “It’s a strong brand recognized around the world. … The Polycom brand is extremely well-recognized for technology and innovation and quality.”
Elliott officials last fall built up a 6.6 percent stake in Polycom and a 9.6 percent stake in Mitel, and almost immediately began pushing the idea of the two companies merging to create a larger player in a crowded UC and collaboration market and increase shareholder value. After the deal was announced, Jesse Cohn, senior portfolio manager at Elliott and a driver of the hedge fund’s growing activity in the tech industry, said the merger “makes perfect strategic and financial sense.”
“The combined business will have far greater scale than either company alone, the ability to deliver a full array of products to customers, and the means to invest behind product areas that will provide stability and growth for the future,” Cohn said in a statement. “Financially, the combination will create a company with a strong balance sheet, meaningful synergies, and enormous cash flow generation that can be used to engage in value-generative M&A.”
Since taking over as Mitel CEO in 2011, McBee has been moving the company away from its roots in customer-premises equipment (CPE) and toward the cloud and mobile. The market was quickly shifting in the direction of both, with such trends as bring-your-own-device (BYOD) playing a large role in the mobile push. With the acquisition of Polycom, the company now has a strong video conferencing play as well. The company in the past has partnered with smaller vendors like Vidyo, but Polycom brings a broad installed base, partnerships with major players like Microsoft and wide brand recognition, Mitel’s Spooner said.
Currently, about one in 10 Mitel customers use video, he said, adding that having video in place will help the vendor expand its reach.
ZK Research’s Kerravala said the vendors complement each other in a number of way. Polycom has a strong presence in larger enterprises, while Mitel has primarily been a small- and midsize-business (SMB) vendor, he said. In addition, Mitel’s strengths in the cloud and mobile spaces will help fill in gaps in Polycom’s lineup, and Mitel’s presence in Europe will complement Polycom’s strength in the Asia-Pacific region.
Mitel to Buy Polycom, Will Create Enterprise Communications Giant
With mobile becoming an increasingly important component in the market, Mitel’s acquisition last year of Mavenir Systems will enable the combined company to have its products built into carrier networks and deliver a better quality of service than the over-the-top (OTT) mobile offerings of many competitors, which will be important as such trends as 5G continue to grow, Kerravala said. In addition, Polycom’s Acoustic Fence technology also will improve the quality of products by better eliminating the surrounding noise during video conferences.
The deal comes during a time of high competition and rapid changes in the collaboration market. The changes over the past couple of years include Nokia buying Alcatel-Lucent, Siemens Enterprise Communications becoming Unify and then being bought by Atos, ShoreTel releasing its Connect common platform, Avaya restructuring its leadership team and growing its services capabilities, and Lifesize moving aggressively to the cloud and spinning out of Logitech as an independent company.
Mitel has done its share in reshaping the market, through its acquisitions of Mavenir and Aastra Technologies in 2013.
Kerravala said that the combined Mitel-Polycom company will become the world’s fourth-largest collaboration vendor, behind Cisco, Microsoft and Avaya. Being in a market dominated by Cisco and Microsoft is difficult, he said, but growing into a $2.5 billion company will give Mitel more leverage in the space.
Some of the challenges facing the new vendor will be managing its relationships with other vendors, the analyst said. Polycom has a deep relationship with Microsoft, with more than 40 products that support such Microsoft products as Skype for Business and Office 365. However, Microsoft might now see a stronger Mitel as a competitor, which is one probable reason Mitel is keeping the Polycom name. In addition, IP telephony companies like RingCentral, 8×8, Sprint and Vonage also might see the new company as more of a competitor in the cloud communications space.
During the conference call, McBee noted that both Mitel and Polycom offer open platforms that allow for such partnerships with companies such as Microsoft, and he doesn’t expect that to change once the deal closes.
Officials expect the deal to close in the third quarter. The boards of directors for both Mitel and Polycom have approved the merger. Shareholders for both still must vote on the acquisition. After the deal closes, Polycom shareholders will own about 60 percent of the combined company, and Mitel shareholders will have about 40 percent.
Part of Elliott’s push for the deal was for the new company to be headquartered in Canada—Mitel is a Canadian company, while Polycom is based in San Jose, Calif.—for tax purposes. Such deals—called “inversions”—have been highly criticized by U.S. lawmakers as a dodge by companies to get out of paying their fair share of taxes in the United States.
Kerravala noted that the way the deal is structured—with the help of Polycom cash—Mitel’s net debt leverage is reduced and its balance sheet strengthened, giving it financial leeway to consider other acquisitions. Mitel officials acknowledged that once the integration of Polycom is complete, other deals could be considered.
The analyst speculated that Mitel’s acquiring a networking vendor like Extreme Networks would make sense, giving the company a more complete product portfolio in such areas as WiFi that would broaden its competition with companies like Cisco.