Rich McBee took over as the CEO of Mitel in January of 2011. I never had the opportunity to chat with Rich when he took the helm so I didn't have a clear vision of what he was trying to accomplish with Mitel. Over the past 5+ years, his strategy has become abundantly clear, and it revolves around two focal points that are both intertwined.
The first is to create some unique differentiation for Mitel. The UC space is crowded and has too many vendors that all look like each other. Mitel's vision is to build a unified communications solution provider that is uniquely mobile and cloud centric. As I pointed out in this post from last year, there is a big difference between having mobile applications and being uniquely mobile, and Mitel seems to have a clear understanding of what this means.
The second piece of Rich's vision is to roll up a number of the smaller vendors to create a bigger, stronger company that can compete better with the likes of Cisco, Microsoft and, to a lesser extent, Avaya.
To fulfill on both parts, Mitel has been very active in buying other UC providers to add to Mitel's size and capabilities. During McBee's tenure, Mitel has made the following acquisitions:
Despite the flurry of M&A activity, Mitel still has a number of holes in its portfolio, most notably video. This morning, Mitel plugged that hole by announcing its intention to acquire Polycom for $1.96B. This news shouldn't be a big surprise to anyone following the UC industry, as there has been widespread speculation of a Mitel–Polycom merger, since hedge fund Elliot Management, an investor in both companies, has been pressing for the deal.
From a shareholder perspective, the acquisition is at a 22% premium from the "unaffected" share price on April 5 (before the rumor mill heated up). I bring this up because I still believe that had Polycom shareholders waited a year, the company's value would have been higher. Polycom has spent the better part of the last two years revamping its products, which includes the launch of the new Trio and Centro units.
However, I also recognize there is a level of risk involved in waiting. Polycom has been actively changing its go-to-market model and has completely changed its look and feel. There's a new brand and more aggressive marketing campaigns spearheaded by CMO Jim Krueger and VP of Corporate Marketing, Niki Hall. Polycom has developed a new vision and new products to support the vision, and now needs to focus on rebuilding its channel to be more in line with selling to line-of-business managers and consultative sales rather than transactional. Also, despite all the shiny new endpoints, Polycom still lags in the area of cloud and mobile -- Mitel's strength. So it's easy to see why an investor would rather take the "in the bag" premium now rather than roll the dice and see what it looks like in a year.
For Mitel, the most obvious asset it gets with Polycom is a best-in-class video portfolio. In addition to the previously mentioned Centro, Polycom has video endpoints that fit any use case including immersive systems, 360-degree cameras, video phones, desktop units, SMB bundles, and others. The video solutions are outfitted with some unique features such as an acoustic fenceand camera automation technology.
Polycom also has a strong video recording and streaming solution as well as content management, which would seem to be a nice complement to the MiTeam product Mitel announced earlier this year. Also, its SoundStation (now Trio) is the de facto standard conference phone today, which means Mitel now has a touch point into almost every organization.
The combined company creates some interesting possibilities. Polycom is an excellent engineering company and has always been among the leaders, if not the leader in providing high quality audio and video. However, across the industry, business class voice and video quality is still spotty when running over Wi-Fi and cellular networks. The combination of Polycom and Mitel could build products that are directly integrated into mobile networks instead of purely running over the top, making it easier to control quality. This would have that 1+1 = 3 effect that would accelerate the growth of the combined organization as it looks to catch the upcoming 5G wave. Also, consider the possibilities of having technology like Acoustic Fence in mobile networks, and that opens up a world of possibilities.
There is also very little overlap in the two portfolios other than IP phones, so there won't be much product rationalization to do. I would expect that over time the overlap in phones will be addressed, but it shouldn't cause any near-term challenges.
Geographically, the two companies fit together like pieces of a puzzle. Both companies have significant presence in North America, but the two companies differ internationally. Mitel is strong in Europe, where as Polycom has a big Asia-Pacific business. The two companies combined create a globally strong organization with over 7,700 employees in 48 countries.
Polycom is one of Skype for Business's best technology partners. From what I understand, the Polycom brand is going to stick around, so it can continue to work with Microsoft and develop interoperable products while Mitel serves its own customers with its own call control. There's no reason that both strategies can't co-exist within the same company at the same time. Also, given the amount of work Microsoft has put into the relationship, it would make no sense for it to disrupt the partnership simply because the ownership structure has changed.
The bulk of the IP phone system business for Polycom is selling its phones through UCaaS providers such as Vonage and RingCentral. Polycom currently has about 75% of this overall market, and given the expected growth rate of UCaaS, the opportunity ahead of Polycom is tremendous. It's in everyone's best interest, including the service providers, not to disrupt this business. I've talked to other people involved in the UC industry, and there is an opinion that this acquisition is the event that Yealink has been waiting for to disrupt Polycom's business. Conceptually this makes sense, but there are two counter arguments. The first is that building relationships with the IP Telephony Service Providers (ITSPs), particularly the large ones, is a long process. Polycom has spent years cultivating this business and it takes years to disrupt. Second, the quality of Polycom's phones is better than Yealink's, so I don't believe many of the ITSP will initiate a change in phone providers.
Executing on acquisitions is an art, and the McBee-led Mitel has proved now that it knows how to do M&A. Given the track record, I certainly don't expect Polycom to be the last acquisition by Mitel. There are a couple of directions Mitel could go from here.
The missing piece of their collaboration story is a communication platform as a service (CPaaS) solution, putting companies like Nexmo and Plivo in the crosshairs, as I believe Twilio would be too pricey. Alternatively, Mitel may choose to build out an end-to-end solution, which would entail purchasing a network infrastructure vendor. Extreme Networks has a broad network portfolio that encompasses data center, campus, branch, and Wi-Fi and has a market cap of only $336 million.
I still believe that Polycom's turnaround was underway and the shareholders could have got a higher valuation a year from now, but I also get the fact that the stock has bounced around this price now for about four years so taking the bird in the hand makes some sense.
However, the combined "MiPolyTel" is now a formidable player in the collaboration industry with presence now in 82% of the Fortune 500, mobile deployments in 47 of the top 50 economies, and is in a much better position to compete with the big boys.
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