After MANY months of rumors, the news is finally in. Unified communications and telephony product/services vendor Mitel (MITL) has announced its intention to acquire collaboration, videoconferencing, and phone vendor Polycom (PLCM).
As was widely reported in the business press, the real discussions and due diligence began in October 2015 when Elliot Management (an investor in both companies) pushed for the two firms to combine.
The news is still hot off the presses. The paperwork was signed by Mitel yesterday morning, and by Polycom last night, and the press release went live at 6 AM EDT. The Wainhouse Research team was briefed only five minutes later ... yes, at 3:05 AM PT. While some of the details remain sketchy, here's what we know and think.
The deal is expected to close in Q3. The plan is that Polycom will retain its brand and its San Jose headquarters, and operate as an independent division within Mitel. Two Polycom board members will take positions on Mitel's board. Details about Polycom's executive staff have yet to be released. Once merged, the combined company will have a total workforce of about 7,700 employees and annual run rate of roughly $2.5 billion. Mitel expects the acquisition of Polycom to be accretive to its shareholders in 2017.
In terms of financials, Polycom stockholders will receive $3.12 in cash and $1.31 Mitel common shares for each share of Polycom common stock, yielding a combined value of $13.68 per Polycom share (a premium of about 22%) and a total deal value of roughly $1.96 billion in cash and stock. So Polycom shareholders need to have faith in Mitel's future, while Mitel's share price has already declined slightly since the announcement.
So now onto the real questions: What are the real benefits of this deal? Who makes money? What are the risks and concerns?
- Financial -- While theoretically not the main benefit of this transaction, the merging of these two companies is likely to yield some cost savings via staff reductions, elimination of redundant areas (e.g. finance, marketing, etc.), supply chain and facilities optimization, economies of scale, etc. Perhaps a 5 to 10% reduction in operating costs, although CEO Peter Leav's team has pretty much squeezed the fat from Polycom's operations over the past two years. Also on the financial front, it is worth mentioning that in the past two years, Mitel's revenues have totaled $2.25 billion, just slightly less than Polycom's $2.61 billion, making the companies appear to be relatively equal, but Mitel's net income is negative $28 million, while Polycom's is positive $112 million. The cash flow benefits to Mitel are significant.
- Technology and Products -- Mitel gains access to Polycom's conferencing products (video, audio, and content), phone products, engineering prowess, and global network of channel partners. Polycom gains a UC wrapper and call control engine, which we at Wainhouse Research think has been an important missing ingredient. Stated differently, this deal gives Polycom a seat at the UC table.
- Channel and Customer Base -- Both companies could potentially benefit in this area as Mitel gains access to Polycom's global channel of AV/videoconferencing resellers selling into enterprise accounts, and Polycom gains access to Mitel's channel selling into SMBs. The SMB connection provided by Mitel is a major plus for Polycom. Nevertheless, cross training voice guys to sell room video conferencing systems and vice versa is not a slam dunk.
- Footprint -- Via this acquisition, Mitel expands its global footprint. This is especially true in APAC, where Polycom has a strong presence and Mitel currently does not. For example, Polycom currently has 20 people in marketing in APAC, while Mitel has only two.
- Cloud Service -- Polycom has struggled to find its way in the cloud services area. Via this merger, Polycom gains access to Mitel's UC/telephony cloud service offering, and Mitel gains technology that at some point could enhance the video capabilities within its cloud service.
Overall, we are somewhat neutral on this deal. While we believe Polycom has been floundering in the channel a bit for a while, and while we recognize the inherent benefits of consolidation, we have concerns about the long-term success of some of Polycom's current strengths once folded into the Mitel umbrella. For example:
Each of the players brings something to the table: money, technology, cloud, channel, enterprise customers, SMB customers, etc. And Mitel has strong acquisition experience, although the company's history is riddled with mergers, acquisitions, splits, spinoffs, name changes, and private equity deals. However, how much of Polycom's current value stems from its independent status? And how long will it take before Mitel integrates the Polycom products into its product and cloud offerings? While perhaps unfair to draw such a comparison, Avaya acquired Radvision almost four years ago and has yet to fully merge the offerings.
In short, while there are some potential synergies in this deal, there are many risks. The biggest short-term risk would be the loss of phone revenues in both Skype and Open SIP phone product lines. And of course, any merger/acquisition has risk associated with loss of focus, re-organizational distractions, personnel shifts, new messaging, and re-aligning and re-training direct and indirect sales resources.
Acquiring Polycom seems to have been driven by Elliot Management, a large shareholder in both companies, in a bid to create "scale" to drive efficiencies and to compete against Cisco. But "scale" isn't the be-all, end-all here. It's more about positioning your products and your sales force to address the future market. Polycom and Mitel are strong players in their own right, but whether 1 + 1 = 3 remains to be seen.
This article was co-written by Wainhouse Research colleagues, Andrew W. Davis and Ira M. Weinstein, both regular contributors to No Jitter and Enterprise Connect.
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