And Then It Happened …
Jul 27, 2017
Reading the news about Mitel’s acquisition of competitor ShoreTel this morning, I couldn’t help relating to a book my son once brought home from school titled “And Then It Happened”. The book is comprised of stories that build a plot line up to a certain point and, just when things are about to unravel, the phrase “and then it happened” breaks the flow. Teachers use the book to practice creative writing with the students, encouraging them to come up with their own ending. The actual ending is often completely unexpected.
That’s exactly how I felt about the Mitel-ShoreTel news today. Fierce rivals, for the past few years Mitel and ShoreTel have been building their companies’ life stories, with their plot lines occasionally intertwining, but leading us to believe that their journeys would never quite fully merge or intersect. And then it happened …
Today, Mitel announced that it “will acquire 100% of the outstanding shares of ShoreTel common stock in an all-cash transaction at a price of $7.50 per share, or a total equity value of approximately $530 million and a total enterprise value of approximately $430 million. The purchase price represents a 28% premium to ShoreTel's closing share price on July 26, 2017.”
Mitel’s position outside North America will be less affected by this acquisition due to ShoreTel’s limited international presence. However, with about $260 million 2016 UCaaS revenue and about 750,000 installed UCaaS users as of the end of last year, Mitel is a formidable global player. Besides its market power in terms of retailUCaaS revenue and users, also critical to Mitel's ability to capitalize on overall UCaaS market growth are two other factors:
a) its strong traction as a platform vendor to other service providers (through legacy Mitel as well as Telepo technologies)
b) its (now expanded through both the Toshiba and ShoreTel acquisitions) premises-based solution customer base that can be migrated to the cloud
Notable and interesting is that the press release doesn’t even mention the potential expansion of the combined entity’s share in the declining, but still sizeable premises-based telephony market. While projected double-digit growth rates in the UCaaS market justify Mitel’s emphasis on the acquisition’s impact on its cloud presence, its increased share of the global premises-based installed base should not be underestimated.
Mitel’s 2016 share of premises-based system line license shipments after the two recent acquisitions shifts the Canada-based vendor from fifth to fourth position globally (and to third position in terms of IP line license shipments, specifically), considerably improving its ability to compete in this troubled space. With all three merged entities having strong traction among SMBs, which are primary targets for cloud migration, as well as large reseller channels, the new combined Mitel is also well positioned to accelerate UCaaS adoption. In particular, the acquisition will solidify Mitel’s strong hold in the North American premises-based communications systems market.
Another important benefit of the acquisition is ShoreTel’s communications platform as a service (CPaaS) acquired earlier as part of Corvisa. CPaaS is likely to provide Mitel with unique opportunities to complement its communications portfolio with more custom-tailored solutions for both customers moving to the cloud and those choosing to keep some of their communications assets on the premises. CPaaS is a growing market, presenting some competitive challenges to UCaaS solutions but also enabling providers to offer a more holistic approach and more options to businesses looking to upgrade their communications capabilities and/or address unique use cases.
Further benefits from the acquisition will affect Mitel’s contact center capabilities. Frost & Sullivan’s Principal Analyst, Nancy Jamison, chimed in with some relevant comments. According to Rich McBee, Mitel’s CEO, the decision to re-engage with ShoreTel was driven by UCaaS. But this means that even though contact center is a key piece of Mitel’s portfolio, it is secondary to UCaaS. With so many contact center platforms from Mitel’s prior acquisitions, it will be interesting to see how the ongoing roadmap plays out. Rich says that the roadmap will be driven by ease of use, ease of installation, etc., and that Mitel has always respected ShoreTel’s design in this regard. However, Mitel will need to consider how much installed base they will have to move to a new platform, if ShoreTel’s contact center platform was actually the winner in the due diligence process.
Contact Center analyst Brendan Read adds that Mitel’s share of the declining on-premises inbound contact routing and contact center systems market has increased. But Mitel faces formidable competition from Genesys and NICE for hosted contact center solutions following their recent acquisitions of Interactive Intelligence and inContact respectively, and from 8x8 and Five9. Mitel should not count Avaya out with its considerable installed base, resources, and talent once it completes its reorganization. Mitel's ability to gain market share will then depend on how quickly it can successfully combine both companies' solutions and differentiate itself in the contact center market.
Mitel and ShoreTel also report having complementary channels (with only 10% overlap) providing the combined company with 3,200 resellers to leverage for extended market reach and greater customer value. The two providers have also traditionally focused on different verticals, which will allow the new entity to capture broader market opportunities across a larger number of industries.
It’s important to note, however, that Mitel is up for a bumpy ride in the near future. Besides the typical cultural and purely organizational integration challenges accompanying every merger and acquisition, Mitel will need to make tough decisions about how to rationalize its UCaaS and premises-based portfolios. The three companies' (Mitel, ShoreTel and Toshiba) existing retail UCaaS offerings are based on completely different codes and each has its strengths and shortcomings. On one hand, it makes sense to maintain all three platforms as they provide the smoothest and cost-effective paths for each vendor's premises-based customers to move to the cloud or to hybrid environments. On the other hand, maintaining and continually evolving several platforms will require a considerable investment and may create some confusion among partners and customers.
Another key issue is related to Mitel's role as a UCaaS platform vendor to other providers. With this acquisition, Mitel has made a clear statement that it intends to assert itself as a powerful retail UCaaS provider. However, that creates a potential conflict of interest between Mitel and its provider partners. The company now has an interesting set of decisions to make, and most critically, will have to be able to clearly articulate the outcome to partners and customers.
Overall, this transaction is in line with the consolidation trends taking place in both the premises-based and hosted/cloud communications markets. With premises-based solution revenues steadily declining, vendors such as Mitel are compelled to look for ways to rapidly establish presence in the UCaaS market. Still highly fragmented, the UCaaS market creates huge opportunities for more agile and financially stable providers to consolidate and emerge as leaders ahead of numerous small competitors.
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