In his first interview since taking over as CEO of Siemens Enterprise Communications Group (SEN Group) earlier this year, Mark Stone told me today that Siemens will continue to pursue strategic acquisitions, and that Avaya outbid Siemens by something under $100 million in the auction to acquire Nortel Enterprise Solutions.Stone said that SEN Group is looking at 12-14 opportunities that it considers right for M&A activity, and is in "active discussions" for 6-8 of these opportunities. He said that SEN Group will "without a doubt" be pursuing acquisitions--"We said from the start that M&A was a huge piece of the opportunities" for Gores Group when it purchased a 51% stake in SEN Group in 2008.
Stone said gaining scale and potentially scope will be critical as the industry consolidates. "I think the game is accelerating, and we can't stay complacent on that," he said.
SEN Group is looking at three types of acquisitions, Stone said:
1.) Pure scale play--That is, growing in its core markets. A Nortel acquisition would have fit under this heading.
2.) Geographic--Siemens is a global market leader, but Stone readily concedes that it has a "relevant but not sizable" share in North America, which is half the market. "You could argue we need to go in and make an acquisition or two to bolster our position in North America," he said.
3.) Application or Technology-Focused--A parallel track is to make acquisitions that broaden the company's technology focus; for example, Siemens could decide to make a play in video, or in vertical industry applications, Stone said.
Acquiring Nortel Enterprise Solutions would have satisfied at least two, and potentially all three of these categories, and Mark Stone said, "We thought it was a fantastic fit." He noted that Nortel had been in the hunt to buy the Siemens enterprise business before Gores Group took its stake, so the two parties were very familiar with each other and the potential synergies that a combination of the two could bring. And he noted that a Nortel acquisition would have satisfied three points for Siemens:
1.) Geographic, giving Siemens a strong North America play.
2.) "Hitting critical mass in core areas." This includes not just the voice aspect, but also the combination of Siemens' Enterasys data networking business with Nortel's data (ex-Bay Networks) business. This would have been a billion-dollar business, he noted.
3.) Synergies/scale: "Scale does matter," and will increasingly be a factor in success in this market, Stone said.
Avaya's bid of $900 million plus $15 million for employee retention exceeded the number that the Siemens set as their upper limit going into the auction; this Siemens upper limit was "strong double digits [i.e., tens of millions] but not triple digits [i.e., hundreds of millions] below where they ended up." So somewhere in the mid-$800 million range (the bidding started with Avaya's "stalking horse" offer of $475 million).
Our interview coincided with the first anniversary of the Gores Group acquisition of the controlling interest in Siemens Enterprise Communications, and Siemens marked the occasion with an an announcement that highlighted some of the progress the company has seen in the past year:
* Sales are up 12% in the quarter just ended, including an 8% increase in the large enterprise segment. Siemens Enterprise Communications has also cut costs 25% over the past year, so that the company "remain[s]debt free and in a strong cash position," obviously an important factor if it plans the kind of strategic acquisitions Stone discussed with me.
* Shift in emphasis to indirect sales. Mark Stone wouldn't set a firm number on how much of Siemens' business the company wants to transition to indirect sales (as Avaya has done with its stated goal of getting to 85% indirect sales in 2 years), but the company is clearly putting a strong emphasis on building its channel. "Through strategic partnerships with companies such as Netlink, SEN Group has moved to an indirect model in 27 additional countries," the announcement states. "The company has also signed agreements with Synnex and Westcon, further extending its commitment to the channel and improving customer reach." They also just announced that they've hired Denzil Samuels, formerly of Avaya, to be Siemens'Senior Vice President of Worldwide Channels and Alliances.
So here we are, one year into the Gores Group regime at Siemens, and there have certainly been better years to try and rebuild market share and confidence in Siemens as an enterprise communications player in North America. The economy held down buying activity, and though Siemens had the rare opportunity to acquire a major competitor when Nortel went bankrupt, Avaya was ultimately willing to pay a higher price--whether too high a price, time will tell.
But I came away from my conversation with Mark Stone believing that the SEN Group management is determined to make a play for the North American market, and SEN Group is certainly better positioned for an acquisition strategy than most of the other competitors who might be inclined to make such a move. With OpenScape as its core UC product and forward-looking projects like the Amazon EC2 cloud integration, and the recently-announced Twitter integration, Siemens is keeping up in the race for mind share. I think we can expect them to make some news in 2010.
