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Why RingCentral Should and Shouldn’t Buy 8x8


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Image: sondem - Alamy Stock Vector
This week, reported that RingCentral is exploring a take-over of 8x8. I've heard this rumor before and with increasing frequency, as the valuation in 8x8 and its peers have fallen through the floor. Of all the publicly traded cloud communications providers, 8x8 is the most appealing from an acquisition standpoint, as it has a good product, a decent customer base, and an absurdly low valuation. At the time of writing, the market cap is only $474 million, which includes a 7% bump from the RingCentral rumors.
This begs the question, should RingCentral pull the trigger and buy its rival? I can make a reasonable argument for and against it, which I will do in the rest of the post, but then give my prediction as to what will happen.
Low Valuation Makes 8x8 an Attractive Takeover Candidate
8x8’s peak market cap was a shade under $4 billion, so acquiring at this price seems like a steal. Its past quarterly results should better balance growth and profitability with a goal of having double-digit profitability in its 2024 fiscal year. Given the trend in previous quarters, the company seems on track to hit this. In acquiring 8x8, RingCentral would gain a company accretive to profitability, although dilutive to growth.
The argument against this is although 8x8’s value has fallen, so has RingCentral’s, which now has a market cap of $3.3 billion, down from a high of $42.7 billion. At its peak, RingCentral could have made an overvalued stock offering, like what Zoom tried with Five9, swallowed up 8x8, and essentially gotten it for next to nothing on a stock-adjusted basis.
The Market is Maturing; RingCentral Needs 8x8 to Continue to Grow
Currently, the UCaaS market has no shortage of providers, and we might have too much supply for the level of demand. In mature markets, share gain is often hard to do without an acquisition. RingCentral could go on a buying spree and snap up many of the smaller UCaaS providers and do a roll-up — like the Rich McBee-led Mitel. In addition to 8x8, RingCentral could set its sights on other small players like Sangoma, Wildix, or even Dialpad, if it wants to raise a bunch of debt. This type of consolidation would give RingCentral consistent, year-over-year high growth numbers and cross-sell opportunities.
The downside of this strategy is that integration becomes a big challenge, and RingCentral would need to maintain multiple platforms. This is one of the factors that eventually derailed Mitel. Also, I would argue that RingCentral does not need to acquire to grow since we are in the early stages of cloud communications. If one takes Zoom, RingCentral, Webex, and others at face value regarding the number of cloud-calling seats sold today, we are barely at 20 million. This is just 5% of the 400 million business desktops in existence today. I would argue that the bigger challenge for RingCentral and the rest of the UCaaS providers is to get the status quo off legacy systems and into the cloud. Just 25% of the market moving would increase the total addressable market (TAM) five times.
By Acquiring 8x8, RingCentral Would Get a Contact Center Solution
Over the last several years, we’ve seen a trend toward UCaaS/CCaaS integrations. To date, RingCentral’s strategy is to resell NICE’s product. On the other hand, 8x8 has been aggressive with its XCaaS messaging, which is based on having a single software stack for UCaaS and CCaaS (as CPaaS). An acquisition would give RingCentral its own product, obviating the need for NICE. This would be like the tact it took with Zoom, as at one time, RingCentral Video was Zoom under the covers. Today, RingCentral has its own video, and all new sales no longer include Zoom. With 8x8, RingCentral could build its own unified product and eventually shed NICE.
The opposition to this point is that RingCentral has been wildly successful selling contact center with NICE as its partner, and the purchase of 8x8 would disrupt this. When RingCentral resold Zoom, the partnership was in place for RingCentral to be able to check the box when it came to video, but its sales motion in UCaaS was to sell calling. One could look at Zoom as a stop-gap measure until it could build its own video. With contact center, RingCentral has built a big business, and many of its UCaaS sales often start with NICE-based CCaaS. Also, while 8x8 has a nice down-market contact center solution, it’s not nearly as sophisticated as NICE, which has much greater enterprise appeal.
ZK’s Prediction
While anything is possible, I do not believe RingCentral will pull the trigger on 8x8. I am a believer in the expression, “where there is smoke, there is fire,” and RingCentral might likely have looked or is currently looking at 8x8. If they can get the company for a bargain, it would make the acquisition. All well-run companies, of which RingCentral is certainly one, constantly look at moves that can increase shareholder or customer value. It’s likely the company has looked at other moves, but it doesn’t mean there is anything imminent.
From 8x8’s perspective, under Dave Sipes, the company has done a much better job of sales execution and lowering costs to shift to improve profitability. Management’s tone on earnings calls is that this improvement will continue, so selling later should fetch a better price. As I said, anything is possible, but I do not believe we will see RingCentral purchase 8x8 any time soon.