Perfect Timing for Mitel, ShoreTel Merger

Yesterday Mitel announced it reached an agreement to acquire ShoreTel. This one pleases me. I didn't like it when Mitel reached an agreement to acquire Polycom, and I wasn't too keen on Mitel's 2014 attempt to acquire ShoreTel, but now the time is right.

Mitel declared itself the industry consolidator not long after its successful acquisition of Aastra in 2013. Mitel's M.O. is to acquire distressed companies that offer synergies and assets it can leverage. That's harder than it sounds. Mitel was usurped in the Polycom deal, had to undo its Mavenir acquisition, and simply couldn't get ShoreTel to negotiate back in 2014.

Relationship Recap

In 2013, ShoreTel CEO Don Joos had started a multiyear gamble to repeal and replace the entire portfolio -- appliances, platforms, and endpoints. It was a huge undertaking that was nearly complete (or thought to be) when Mitel made its unsolicited offer to acquire the company in October 2014 for $8.10 per share in cash.

With no response from Charles Kissner, ShoreTel chairman at the time, Mitel increased the bid to $8.50 a share in November 2014. At that time ShoreTel's product line had incompatible solutions for premises and cloud. The company had been feverishly working to complete Connect, its new platform using a single code base that would allow its use for managed cloud service, on-premises, or hybrid deployments, but it wasn't done yet. ShoreTel declined to engage in negotiations, so Mitel abandoned the offer soon after.

The problem was, Connect wasn't as close as believed, and when it did launch, in August 2015, it got off to a rocky start. It was a new platform, with a new name that failed to leverage the goodwill from existing products and services.

For example, ShoreTel Connect Online replaced ShoreTel Sky, a UCaaS offering that resulted from the company's 2012 acquisition of M5, a premium provider. Given that M5 had earned Gartner recognition as a Visionary back in 2011, its acquisition should have given ShoreTel an early-mover advantage in UCaaS. Yet, instead it focused on creating that single platform while allowing the space to get crowded.

A Lot Has Changed Since 2014

The ShoreTel of today is much different from the ShoreTel that Mitel pursued in 2014. Rocky start aside, for example, ShoreTel Connect is impressive -- from a technology standpoint. One of the industry's newest UC platforms, it supports onsite, cloud, and hybrid deployments. Unfortunately, neither the stock market nor end-user organizations have responded well. The company never got its momentum back. With its revised offer, Mitel could have paid much less than it was willing to in 2014, but there were other changes at ShoreTel as well.

Most noteworthy, ShoreTel gained a CPaaS offering in its acquisition of Corvisa at the end of 2015. ShoreTel leadership initially spun this as a contact center play, but later positioned it as a CPaaS story. The Corvisa solution is now known as ShoreTel Summit, and is part of a growing trend of combining UCaaS and CPaaS (Vonage/Nexmo, Genband/Kandy, Avaya/Zang, and more). ShoreTel Summit could fill a void in Mitel's portfolio.

ShoreTel also has expanded its reach with new distributors and master agents. But still, Mitel claims ShoreTel's distribution network has only about 10% overlap with its own. Not clear is whether that overlap includes dealers or just distributors and master agents. This dealer network is a significant advantage over many competitors, especially in the UCaaS market.

Had Mitel and ShoreTel reached a deal in 2014, the story then would have been about culture conflicts. There were some big personality conflicts in the past. I don't think it's a coincidence that this deal comes just a month after Kissner stepped down as ShoreTel chairman.

Mitel has changed a bit since 2014, as well. For example, Mitel has expanded its video strategy with Vidyo, and it should fit right into ShoreTel Connect's client. Mitel also announced a building-block approach to applications. As part of that, Mitel announced CloudLink, which normalizes different call managers (see recent No Jitter post, "CloudLink: Mitel's On-Ramp to Cloud and IoT"). Mitel is in a strong position to leverage ShoreTel Connect and Summit. Mitel also recently launched its 6900 series endpoints, which I'm sure will find their way to attaching to ShoreTel systems.

ShoreTel has a few more assets than it had in 2014, but not as much upside. The agreed purchase price, of $7.50 per share, makes the ShoreTel valuation about the same as it was with Mitel's $8.10 offer in 2014. As a William Blair newsletter pointed out, ShoreTel today has more shares than it did in 2014. Note, Mitel had intended that $8.10 price as a starting bid, as evidenced in its raise to $8.50.

Continue to next page for a look at what's ahead at Mitel and the competitive impact