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Mitel and Polycom? Nyet, Nyet Elliott

As reported on No Jitter and elsewhere, activist investor and hedge fund manager Elliott Management earlier this month disclosed it holds equity positions of about $100 million in Mitel and Polycom -- and wants the companies to merge. On paper, Elliott's idea makes some sense... but logically, not so much, not right now.

But we must take its interest in seeing these UC peers merge quite seriously. When it comes to shaking up the tech industry, Elliott has had as much impact as any organization. In case you're not familiar with Elliott, you should know that the company played a significant role in the recent Dell-EMC merger, was the party responsible for taking Riverbed private, and currently has a 6.2% stake in Juniper Networks.

To recap on the Mitel-Polycom front, Elliott holds about a 6.3% stake in the former and about a 4.4% share in the latter -- healthy positions, indeed. In an open letter, he declared that the unified communications space is long overdue for consolidation and called for merger of these two longtime participants in the UC game. In some ways, Elliott makes a good point. As No Jitter associate editor Michelle Burbick pointed out in a recent post, the UC market is really dominated by two heavyweights: Cisco and Microsoft. Obviously, if you work in or follow this market, you don't really need share numbers to know this -- just talk to customers and you'll likely hear that Cisco and Microsoft UC platforms are both in use at their organizations.

Competing with one 800-pound gorilla is tough, but two? Well that's certainly a daunting prospect, and combining Mitel and Polycom would create a $2.5 billion company that would generate more cash and be able to make more moves to challenge Cisco and Microsoft than either could manage individually.

However, I think it's too early for Mitel and Polycom to entertain Elliott's merger idea. This is because I believe each can grow share on its own.

Transitional Prospects
If you've been a reader of my postings over the years, then you'll know that one of my core tenets is that the best time to take share is when markets are in transitions. Well, UC is certainly in a transitional period. What was once a hardware-centric, premises-based market is rapidly becoming mobilized, moving to the cloud, and embracing software-based platforms.

These trends certainly haven't gone unnoticed by Mitel, Polycom, and a number of other vendors. In fact, both Mitel and Polycom have gone through significant restructuring over the past few years to capitalize on these market trends.

Mitel On The Move
Mitel has invested heavily in its cloud platform and has been reaping the rewards of late. However, as strong as the UC-as-a-service (UCaaS) market has been over the past few years, almost all the growth has come from North America. It seems that Europe has finally come around to the UCaaS value proposition, and I’m expecting to see that region become a high-growth market over the next several years.

Also, in March of this year, Mitel made a rather curious move when it acquired Mavenir Systems, which provides communications solutions to mobile operators. Every mobile service provider today is building out a robust LTE network, and Mavenir gives Mitel a foothold in this fast-growing market. But in my opinion, the most interesting element of LTE isn't the speed but rather that it's an all-IP network.

The combination of Mitel and Mavenir creates the opportunity to redefine enterprise UC by extending to the mobile operators. Mitel gave a bit of a preview with last week's mobile announcement, and I'll be joining the company next Wednesday, Oct. 28, at 2:00 p.m. ET for a No Jitter/Enterprise Connect-hosted webinar on how UC and mobility go hand in hand (register here).

UCaaS is growing here, and is poised for even faster growth as organizations in Europe hop on the bandwagon. Combine this with the fact that Mitel has only just laid the groundwork for its Mavenir play, and forced consolidation with another company seems premature. If Elliott were to justify its call for consolidation with the idea that a combined company would accelerate Mitel's mobility plans, then consolidation might make sense. But consolidating these two companies just to create one larger competitor doesn't work for me.

Promise for Polycom
I see similar promise with Polycom, which recently launched a number of new products designed to grow the company's addressable market by allowing it to capture more of the revenue typically spent in a meeting space. Like Mitel, Polycom has been a big winner in the UCaaS market, as many of the major IP telephony service providers treat its IP phones as the de facto standards. Now that many of the European telcos are rolling out cloud-based voice services, Polycom should expect to see significant upside as UCaaS expands around the globe.

Lastly, Polycom has recently gone through a shift in channel strategy. The process, which has been somewhat disruptive, is one of the reasons the past couple of quarters have been somewhat lumpy. While building a channel is never done, Polycom has finished much of the heavy-lifting in this area, so success now is down to channel execution.

As is the case with Mitel, Polycom has had to disrupt itself over the past few years to capture the opportunities created as UC continues to evolve. I believe selling or merging Polycom now would be a mistake as the company should benefit greatly over the next few years for all the hard work put in over the past couple of years.

I understand that maximizing shareholder value is important, and so a merger between Mitel and Polycom may look attractive right now from that perspective. However, having a bit of patience and allowing both companies to execute on the strategies they have put in place may yield better returns in the future.

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