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Mitel Courts Microsoft in PolyCom Bid

Iain Morris
4/15/2016

Executives at unified communications (UC) players Mitel and PolyCom insist their pending $1.96 billion merger could lead to fresh opportunities with software giant Microsoft.

Polycom Inc. (Nasdaq: PLCM) already has a close relationship with Microsoft Corp. (Nasdaq: MSFT), supplying IP equipment to customers using Microsoft's Office 365 and Skype for Business products. Last month, the partnership was extended to include the use of video-conferencing technologies.

But this morning's news that Mitel Networks Corp. is to acquire PolyCom has triggered concern among analysts about the implications for the companies' other partners -- and particularly PolyCom's arrangement with Microsoft. (See Mitel to Buy Polycom for $1.96B.)

As a vendor of cloud-based UC systems to enterprises and communications service providers, Mitel both competes against and offers some degree of support for Microsoft. Its takeover of PolyCom is aimed at creating a global leader in next-generation voice and video communications. Yet there appears to be concern the tie-up will jeopardize PolyCom's existing arrangement with Microsoft.

During a conference call with analysts, however, executives from both the UC companies insisted their merger could open further doors with the Seattle-based software player.

"We couldn’t talk with Microsoft directly but Mitel has always been an open platform and we have connectors into products for Skype for Business and unique technology that means the relationship with PolyCom and Microsoft could be expanded," said Rich McBee, Mitel's CEO, during today's call with analysts.

Arguably one of the chief risks surrounding this takeover is that it prompts Microsoft to somehow back away from its deal with PolyCom, which is thought to have benefited greatly from that partnership.

Peter Leav, PolyCom's current CEO, was also at pains to quell any concern, suggesting bigger and better opportunities with Microsoft might await a merged entity.

"We have over 40 solutions that work in the Microsoft environment and there are opportunities to expand with the broadened portfolio the two entities will bring," he said on the conference call.

Both McBee and Leav said customer feedback on the plans had been favorable. On the markets, Mitel's share price was trading down by 8.6% on the Nasdaq at lunchtime on Friday, while PolyCom's had dipped by 0.6%.


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According to the mechanics of the deal, PolyCom shareholders will be entitled to $31.20 in cash and 1.31 Mitel shares for each PolyCom share. Based on the price of a Mitel share on April 13, this values PolyCom at $13.68 per share, or 22% more than its share price on April 5. The deal will leave former PolyCom shareholders with 60% of the combined company, and former Mitel shareholders with the rest.

Mitel has indicated the new-look business would generate about $2.5 billion in annual revenues, based on 2015 results, and EBITDA of around $350 million.

PolyCom saw revenues drop by 5.8% in 2015, to about $1.27 billion, with net income rising by 63.8%, to $68.9 million.

Mitel's revenues in 2015 were up by 4.9%, to $1.16 billion, but its net loss widened to $20.7 million from $7.3 million in 2014.

Analysts expressed concern that Mitel's statement on the PolyCom deal contained a slightly more cautious forecast of results for the first three months of 2016 than it had previously issued.

The company now expects to generate revenues of $270-280 million and an adjusted EBITDA margin of between 7.5% and 9.5%. Previously, it had estimated revenues at $270-295 million and the EBITDA margin at between 7% and 11%.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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danielcawrey
danielcawrey
4/16/2016 | 1:45:16 PM
Skype
It would seem as though some kind of strategic partnership between Polycom and Microsoft's Skype would make a lot of sense. The reality is that Skype seems to be falling off, as organizations are switching to tools like Slack.

I think Microsoft really needs to give Skype a boost, given the company has invested immensely in the technology behind it. 
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