Following Mitel's public disclosure yesterday that it has offered to buy competitor ShoreTel, industry watchers are busy speculating as to the motivation for the unsolicited bid. Many consider this the next natural step in Mitel's strategy of amassing market share through acquisition, but I see the desire for a common UC platform as a primary driver, too.
To recap, the $540 million cash offer by Canada-based Mitel for US-based ShoreTel equates to about $8.10 per share, about a 20% premium to where the stock had been trading. In its disclosure, Mitel indicated that ShoreTel had rejected an earlier proposal, also for $8.10 per share, made on Oct. 2. In an official statement, ShoreTel said it is reviewing the current bid, which will remain open until Nov. 20. While ShoreTel hasn't officially rejected the bid yet, it most likely will, given this bid is identical to the last one.
Much of the industry thinking around the bid centers on Mitel CEO Rich McBee's openness about wanting Mitel to be a rollup company and amass market share by consolidating many of the smaller vendors. From that perspective, the bid is logical.
Mitel had previously acquired InterTel and fellow Canadian company, Aastra. On paper, rolling up ShoreTel next makes a lot of sense. ShoreTel has the majority of its installed base in the US, where Mitel is relatively weak. Also, on paper, a rollup company would create a stronger competitor in a market that's dominated by large vendors. The #1 and #2 share vendors in this market (or co-#2s, as per my last blog) are Cisco and Microsoft, huge companies, but even some of the other solution providers -- Avaya, Polycom, Alcatel-Lucent, Unify, and NEC -- aren't exactly small companies.
However, I'm not sure that a rollup in UC makes sense. I agree that in UC there's too much supply and not enough demand, but rationalization through consolidation won't help much. Share gains and losses are very difficult in UC. Cisco gained share when voice became an application over IP, and Microsoft did so by making UC a desktop initiative, but there's no real shift coming on the premises side that would cause customers to ditch one vendor for the other. I think the market for premises-based systems needs to be rationalized through attrition more so than consolidation. Having a few vendors actually go away would create share gains for everyone.
Regarding Mitel-ShoreTel in particular, as I indicated in the opening, I believe Mitel has a greater motivation than just a rollup. This is speculative -- I haven't talked to Mitel about this so I could be totally off base, but it makes sense to me so I'll share it.
As noted above, vendors have only attained share gains through market transitions. I also said there wasn't anything compelling going on in the premises segment to warrant share shift. However, there is a transition going on and that's to cloud and mobile UC. In this case, I actually look at cloud UC as an enabler of mobility, so they're linked together.
With respect to cloud, I believe most organizations are going to take a hybrid approach where traditional, premises-based UC is augmented with a cloud solution (or vice versa). In this case, what's critically important is to have a common platform that spans premises and cloud solutions: one platform, one user experience, one set of features that can be delivered in multiple ways.
To me, this is the value that ShoreTel would bring Mitel. ShoreTel has been working diligently on bringing its cloud and premises solutions together and sometime in the near future will launch a common platform that does so. If one believes that hybrid is the future, and if one also believes that ShoreTel's single platform is a differentiator, then the $8.10 per-share price that Mitel has offered for ShoreTel is an absolute bargain. There'd only be an upside to come for ShoreTel. The single platform makes shifting to a hybrid model simple, it makes application integration easier, and it should enable a better mobile experience.
Industry consolidation was the lead story in the news surrounding the potential takeout, but I believe Mitel's desire to get ShoreTel has more to do with the single platform than it does with market consolidation. With or without ShoreTel, Mitel does need to do something with the mess it has for a product portfolio. Remember, Aastra was a consolidator as well, so the combined Mi-Inter-Aastra has somewhere in the neighborhood of 10 platforms creating a significant engineering and channel challenge. Customers like clarity when it comes to product roadmap, and the current Mitel suite of products from all the acquisitions offers anything but clarity. Which products stay? Which go? Which are merged with others? What's the transition path? All good questions that are tough to answer with a portfolio built through acquisition.
The rolled-up share and US installed base can provide Mitel some short-term benefit but the common platform will give Mitel a long-lasting competitive advantage. ShoreTel believes this to be true as well. If Mitel wants to take another run at ShoreTel, it's going to have to up the premium it's offered to date. I'm guessing there's more to come here.
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