ShoreTel and M5: 10 Talking Points
There are some big issues here, but all in all it was an astute move for ShoreTel and M5. It should also provide some interesting responses from competitors.
Earlier this month, ShoreTel announced its intention to acquire M5 Networks. The highlights of the deal include an M5 valuation of $160M (estimated to be about four times revenue), of which about half will be paid in cash. ShoreTel intends to operate M5 as a subsidiary, with key M5 management remaining. This was, in my opinion, a fairly significant announcement for ten reasons:
1) Acknowledgement of Hosted Voice
Hosted voice, enabled by VoIP, has been around for a little longer than a decade. Until VoIP, telecom was severely limited by geography. There were workarounds, but VoIP is naturally geo-independent. Now, a service provider can serve the nation from just one data center. A recent report by Gartner shows the IP Voice-as-a-Service market growing at a 36 percent compound annual growth rate in North America through 2015, to $2.2 billion. But, as Gary Kim points out, when compared to the entire sector, hosted voice could represent less than six-tenths of 1 percent of US industry revenue.
The major premises-based vendors have been slow to acknowledge hosted voice. ShoreTel is the first among them to acquire its way into the hosted space. Mitel and Siemens Enterprise offer hosted solutions based on their own technology. Microsoft appears poised to enter the space as well. Service providers use the products of numerous vendors to create a hosted offering, but for the most part the premises-based providers have remained on the periphery of this emerging sector.
2) Mergers and Acquisitions Likely to Continue
The M&A activity appears to be accelerating. Most hosted voice service providers continue to experience double digit growth, yet the market remains highly fragmented and ripe for further consolidation. Here's a snapshot of some recent activity:
* Cbeyond acquired Aretta Communications in 2010
* Comcast acquired New Global Telecom (NGT) 2010
* Warwick Valley Telephone acquired Alteva in 2011
* Broadsoft acquired iLync Communications (2011)
* West Corporation acquired Smoothstone IP (2011)
* Stage 2 Networks acquired the hosted division of CTI (2011)
* Microsoft acquires Skype (2011)
* Megapath acquired 5280 (2012)
* Shoretel and M5 (2012)
3) Hosted Voice isn't just for SMB
8x8, as a public company, reveals hosted voice is largely adopted by small businesses. 8x8 has on average about 9 lines per customer. M5 appears to be servicing larger accounts, with an average customer size of 30 lines per customer.
Larger companies are embracing various forms of cloud computing and outsourced services at an accelerated rate. As a result, the larger carriers, including AT&T, BT, and Verizon, have entered the sector. Hosted voice and hosted UC are becoming legitimized rather quickly--the sector may see some explosive growth as the average customer sizes head north.
4) Technology Matters
Although M5 initially purchased its platform, it migrated to its own technology. ShoreTel stated that it valued many aspects of M5, including its revenue/customers, technology, and management. ShoreTel determined that acquisition outweighed building its way into the market. To become a hosted service provider, one must either purchase or develop a platform (or purchase wholesale capacity). Most purchase the software, but some including M5, Fonality and Thinking Phone Networks built their own (as did Mitel and Siemens Enterprise).
Whether the software is purchased or developed internally probably doesn't matter much to the end user, but will have a significant impact to the buyer and valuation. For a premises vendor, ownership and control over the platform will be critical. Carriers and peers will want to consolidate their platform, thus a purchased platform will be preferable.
One key opportunity ShoreTel intends to seize upon is the branding opportunity of a highly fragmented hosted market. Other than a few carriers that are targeting large enterprises, very few hosted providers are well known nationally. One of ShoreTel's key strengths is marketing and branding--there are various indicators that the company has much broader awareness in the market than its size might otherwise dictate. ShoreTel intends to rebrand or expand the M5 brand with the ShoreTel name, as well as likely expand internationally. Conceivably, ShoreTel/M5 could become one of the best known brands in the hosted sector.