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More Industry Consolidation Coming?

The UC industry is shrinking, at least in terms of vendors. We have seen some big combinations, including Avaya and Nortel, Mitel and Inter-Tel, ShoreTel and M5, Alcatel and Lucent, Polycom and HP Halo, Aspect and Voxeo, and Microsoft and Skype. The consensus is we are not done yet. It's a fun topic to explore, as every company has a unique set of strengths and weaknesses.

What's driving the consolidation is largely three factors:

* The maturity of the space
* The growth of the cloud/hosted solutions, and
* The growth of Lync.

The industry as a whole is doing fine. Rumors of the death of desktop phones and voice communications are exaggerated. Despite the promise of mobility, organizations are still maintaining enterprise communications solutions.

This is an explorative post--the author has no inside information, and his crystal ball cracked without warning. The conclusion that there are no obvious mergers on the horizon is far from earth-shattering --however it's fun to speculate a bit with what-if scenarios.

Acquisitions often make sense, yet sometimes the way they play out spells disaster. On the pro-side, the combined firm may end up stronger than separate entities. This is the classic 1+1=3 logic where the interaction or cooperation of two or more organizations produces a combined result greater than the sum of their separate parts. On the con side: Cultural clashes or poor execution can prevent the synergy from being realized, and the combined result may deliver greater liabilities than the separate parts.

SEN and ShoreTel: A Good Match?
In thinking about potential M&As, a marriage between Siemens Enterprise Communications and ShoreTel could be very interesting--albeit unlikely.

Why ShoreTel? Because it is the smallest of the top UC premises vendors. Plus the firm has three assets of great value: 1) its North American installed base, 2) its North American channel, and 3) Its cloud business (that it acquired in early 2012). Other potentially lucrative assets include its wireless technology, its ability to simplify the complex, its ability to grow and satisfy customers, and its distributed architecture.

ShoreTel's stock price, up recently, trades less than $5, with a market capitalization around $290 million. Assuming a 35% acquisition premium, the firm could be purchased for about $390 million. That would be about 1.25 times its FY13 revenue of $313 million. As a point of reference, ShoreTel acquired M5 in early 2012 for an estimated four times its revenue. It has also undergone some significant management upheaval this year, with CEO Don Joos on the job now less than a month.

ShoreTel is a force in North America, with a well-regarded brand. It has exceptional customer satisfaction scores, and continues to grow in spite of market conditions. For its size, it has established a strong distribution network with three two-tier distribution partners (ScanSource, Westcon, and Ingram Micro).

ShoreTel would fill some holes for the larger Siemens Enterprise Communications, which is strong abroad, but underrepresented in North America. Fixing that by natural growth and expansion is difficult, time consuming, and frankly unlikely. Siemens was unsuccessful with its own public cloud launch in 2011. Also noteworthy, the Siemens Enterprise executive team is largely based in the US.

Unfortunately, if Siemens Enterprise did acquire ShoreTel, it would likely gut it. Acquisitions always result in overlaps. The goal is to reduce those overlaps, to realize more profit from the new revenue streams.

The acquisition and integration would probably go something like this:

SEN's first objective would be reduce costs, so it would reduce engineering on the ShoreTel appliance and position its own OpenScape Office platform as a natural replacement for the ShoreTel base. That would involve adding MGCP support to OpenScape to create a migration path for ShoreTel phones. Siemens Enterprise would then reduce engineering on ShoreTel Sky, and make plans to replace its underlying engine with OpenScape as well. These changes would give Siemens a single platform for premises and cloud, like Alcatel-Lucent and Mitel. Siemens would also reduce ShoreTel engineering around endpoints, as it already offers a family of SIP endpoints, something ShoreTel is working to deliver.

The real opportunity would be to leverage ShoreTel's abilities around customer satisfaction. If Siemens Enterprise hoped to keep all those loyal ShoreTel customers and dealers, it would need to leverage what ShoreTel does to get such high NetPromoter scores. This likely means reviewing its portfolio and practices through ShoreTel's lens of simplicity.

For about $390 million, Siemens Enterprise would have a North American base, a North American channel (distributors and dealers), a single platform for premises and cloud, and a public cloud offering (with low churn and recognition as a Magic Quadrant leader by Gartner in 2012). At just 1.25 times revenue with some major cost savings potential, the payback would likely be just a few years. SEN also picks up a strong wireless solution that complements the wireless IP phones Siemens Enterprise already makes.

It would be even better (for SEN) if this could happen immediately, as it intends to rebrand in October. ShoreTel has a great brand.

It's got a good fit, but it won't likely happen. With Siemens Enterprise about to launch a new name and product (Project Ansible), it probably doesn't have time or inclination to add more to its plate. Siemens Enterprise is a joint venture between Siemens AG and the Gores Group, and both are rumored to be ready for an exit.

Similar logic could be applied to an Aastra or Alcatel-Lucent combination with ShoreTel, as these two other firms, like Siemens, would value a bigger North American presence. However, the fits are not as strong for Aastra and ALU, especially around the cloud. Aastra is wed to BroadSoft in North America for both large premises and wholesale solutions. Alcatel-Lucent probably has to leave acquisitions off-the table as it implements its Shift plan to regain profitability. However, ALU's new OpenTouch solutions offer a compelling UC solution for both SMB and enterprises, and the firm is working on releasing new public cloud services. It would be nice to see ALU with a stronger North American presence.

Which brings me to the conclusion--that although industry consolidation is inevitable, particularly among premises vendors, I don't see any strong near-term alliances. Outside companies (such as private equity firms) acquiring vendors, as in the case with Permira acquiring Genesys, doesn't count toward industry consolidation. The industry is more likely to see more acquisitions around the periphery, such as the Mitel-PrairieFyre deal. The consolidation within the supply chain rather than among competitors.

So it looks like ShoreTel will be left to go it alone, which is no doubt its preference. Based on its ongoing growth and the reverse trend for many, perhaps ShoreTel will be doing the acquisitions.

Dave Michels is a Contributing Editor and Analyst at TalkingPointz.

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