What's Driving Mitel's $2B Polycom Acquisition?
Scale, partnerships and innovation are three main motivations for Mitel's recently announced $1.96 billion acquisition of Polycom. But it won't be easy making the combined operation successful.
The two companies earlier this month announced plans to combine to create a business with combined expected annual revenue of about $2.5 billion, specializing in cloud and on-premises video, calling and collaboration. Mitel Networks Corp. sells cloud-based on-premises PBX and hybrid voice and unified communications systems to enterprises and communications service providers.
Polycom Inc. (Nasdaq: PLCM) is a video-conferencing systems vendor, which will retain its brand. The combined company will be based in Ottawa, Canada, where Mitel is currently headquartered, and have about 7,700 staff, run by Mitel CEO Rich McBee. (See Mitel to Buy Polycom for $1.96B.)
Mitel's 2015 revenue was $1.16 billion with an operating loss of $10.2 million, while Polycom reported $1.27 billion revenue and an operating profit of $86.1 million.
"The visions of the companies are almost identical," McBee told Light Reading at the Mitel Elite Experience Americas 2016 user group conference in San Diego last week. "Seamless communications and collaboration for us. For them, it's about making collaboration simple."
Mitel's business model is built on partnership, even partnering with competitors such as Cisco Systems Inc. (Nasdaq: CSCO) and Avaya Inc. "We know how to partner and we're good at it," McBee said. "We respect the partner, we don't try to take their business, we don't try to scoop them."
Mitel has 10-11% market share, and needs partnerships to grow, McBee said.
And Polycom has a similar story, the Mitel chief said.
Mitel CMO Wes Durow outlined two companies with complementary strengths and little to no redundancy.
Mitel's strength has been in voice, while Polycom's strength is video. The merger will help combine those two capabilities, in addition to providing size and scale for both companies.
Also, the merger combines Polycom's strength in the Fortune 500 with Mitel's strength in the midmarket.
"They're big. We have the little. We meet in the middle," McBee said.
Mitel will help Polycom add cloud support to its video conferencing. Polycom's service is now built on customer premises equipment without a cloud component, Durow said. Mitel's unified communications cloud service has 2 million subscribers; the company has been moving from CPE to cloud since McBee took over as CEO in 2011.
Mitel will integrate Polycom's video-conferencing features into its own products and services. Those features include facial recognition that knows who's speaking on a conference, and audio conferencing to get rid of background noise -- even keyclicks. Polycom also provides network security, multi-user support and 4G and 5G support.
Mitel will also integrate video conferencing into its partner applications, for example FieldAware field service applications.
Acquisitions are challenging for any company, particularly when a company is acquiring another that's approximately the same scale, as with Mitel's acquisition of Polycom. The acquiring company can become paralyzed by the mundane challenges of merging the two workforces.
That could be big problem for Mitel, says Heavy Reading analyst Sandra O'Boyle. The scale of the integration risks "Mitel looking internally while the unified comms and collaboration market moves speedily ahead," she says.
However, Mitel has the advantage of experience. Polycom will be its sixth acquisition in five years; including the C$392 million ($309 million) acquisition of Aastra Networks two years ago, which built out Mitel's cloud business, it has grown 44% year-over-year (See Mitel to Buy Aastra for C$392M.)
More recently, Mitel acquired VoLTE provider Mavenir for $560 million. (See Mitel to Acquire Mavenir for $560M.)
"We've got a process about M&A," Durow said.
Competition is another potential problem for the merger. "Even combined, Mitel/Polycom face much bigger players such as Cisco and Microsoft with deeper pockets and broader market share," O'Boyle says.
One potential source of trouble for Mitel: Polycom has a lucrative partner arrangement with Microsoft, supplying equipment for Microsoft's Office 365 and Skype for Business. That relationship could be jeopardized if Microsoft sees Polycom as a competitor. However, executives at Mitel and Polycom said the relationship presents opportunities for Microsoft rather than threats. (See Mitel Courts Microsoft in PolyCom Bid.)
In addition to Cisco and Microsoft, Mitel competitors include Avaya, as well as regional competitors such as ShoreTel Inc. in the western US, Unify in Germany, Nokia Corp. (NYSE: NOK) (formerly Alcatel Lucent) in France and NEC Corp. (Tokyo: 6701) in Japan.
Perhaps the biggest potential problem for Mitel is the possibility of businesses moving to new communications platforms, such as Facebook for Business, Google and Slack, O'Boyle says.
Enterprises -- particularly small and mid-sized ones -- could move to open source or generic cloud collaboration tools, buying from service providers, or foregoing collaboration suites to buy individual features such as a single number across fixed, mobile and audio conferencing, O'Boyle says.
These changes could put service providers in control of the customer experience, rather than Mitel and other UCS providers, she says.
"It could be a Mitel cloud platform that the service provider is using but equally it could be any vendor platform, open source etc.," O'Boyle says. "So the power base is shifting."
— Mitch Wagner, , West Coast Bureau Chief, Light Reading.