Mitel Networks expects to lead more takeovers in 2015

Mitel Networks Corp.’s withdrawal of a $574-million takeover bid for California competitor ShoreTel doesn’t mean the company’s merger activity is done. The company says it signals more consolidation to come.

Mitel is a tech company specializing in business communications and collaboration software and services. Headquartered in Ottawa, it currently employs 1,750 people in various locations.

The company withdrew its offer to purchase all of ShoreTel’s outstanding shares for $8.50 each on Nov. 17, a total of $574 million. (All figures are in U.S. dollars.) In a press release, Mitel said the refusal of ShoreTel’s board to engage in any meaningful discussions with regard to an acquisition led to the abandoned offer. ShoreTel argued that Mitel had undervalued the U.S. based company.

“Any management worth its salt would believe that they can drive the stock price further, and that’s to be expected,” says Steven Spooner, CFO of Mitel. “But our frustration through this process has been that they wouldn’t engage with us. You end up bidding against yourself, because you have no new information.”

Still, Spooner says Mitel is still looking to be a consolidator in the field of unified communications.

“At any time, Mitel is looking at 10 to 15 companies that we’re considering acquiring,” he says. “I would expect that you would see Mitel announce other acquisitions in the quarters ahead.”

This is in addition to four acquisitions that Mitel has made in the past 18 months, most notably the acquisition of competitor Aastra Technologies Ltd., finalized on Jan. 31, 2014, for $392 million. The deal, financed through a $405 million loan, expanded Mitel’s size and market reach.

Mitel now has $1.15 billion in sales and 60 million customers worldwide.

There is also risk in consolidation, says Michael McIntyre, finance professor at Carleton University.

“There’s a tendency to overpay and there’s a tendency of underestimating the challenges of absorbing a new organizational culture and underestimating how difficult it is to exploit what you thought that company was going to bring to you,” he says.

The company is expanding in other ways. In August 2014, Mitel appointed Bob Agnes as executive vice president and general manager of Mitel’s Asia Pacific operations. Agnes is based in Hong Kong to strengthen Mitel’s market share in the Asia Pacific region. Spooner says his company believes there are good growth opportunities in the region, “especially with our cloud offerings.”

The acquisition of Aastra also significantly boosted Mitel’s presence in Europe, making the company a leader in market share in Western Europe, according to industry analyst firm MZA Ltd. While Spooner acknowledges a tough economic environment in Europe, he says the “general view is Europe is through the worst and we should see some signs of recovery over the next few years.”

Spooner says that as business confidence returns in various European countries, the hope is companies will start to look at new communications software, purchases that may have been put off in tougher economic circumstances.

McIntyre says concerns about Europe are overblown. “I certainly wouldn’t fear going there,” he says. “There’s a big population base, there’s high GDP per capita … It would be relatively easier to understand customs there, than say, in the Pacific Rim.”

Mitel went through a rebranding on Oct. 1, unveiling a new logo consisting of the company’s name, supported by two interlocking connectors and a new tagline: Powering Connections. The logo is intended to represent a shift in business focus from hardware to more specialized software.

Spooner says the rebranding was necessary to clarify what the company has become. He says Mitel was generally thought of as a hardware company, even though it is essentially moving towards becoming a software and services company.

“It’s getting across the whole connotation that we’re innovators and this is a hip, exciting space to be in,” he says. “You can be fast-moving and entrepreneurial and yet still be a 40 year-old company.”

Mitel has now focused its strategy on “three pillars,” those being core, cloud and contact centres.

Mitel is looking at its core business. Of its roughly $1.15 billion in sales, about 80 per cent, or $900 million, comes from sales of telephony business solutions, including the company’s phone system hardware and software.

Mitel also sells a cloud-based communications platform, MiCloud. The company is currently focusing on growing its cloud service subscriptions. For the first time, during Mitel’s third quarter of 2014, ending Sept. 30 2014, revenues from cloud-based subscription services amounted to more than 10 per cent of total revenues. It is the fastest growing cloud telephony company in the world, with up to 73 per cent increase in cloud users year over year, amounting to a total of over 862,000 seats installed.

“The recent tussle between ShoreTel and Mitel shows how essential cloud technology is to this sector,” says Jeremy Duke, financial analyst for Synergy Research.

ShoreTel has a strong cloud base, the fifth largest market share in the cloud-based telephony market, according to Synergy Research, while Mitel has the fourth largest. Part of the motivation for Mitel’s acquisition bid was, with cloud seats combined, it would hold the number one market share in number of installed cloud seats.

Mitel is also focusing on contact centres, sectors in the company where customer contacts are managed, which have grown immensely through acquisitions over the last year. It acquired long-time contact centre PrairieFyre in June 2013, and the Aastra acquisition included a number of call control platforms, as well as contact centre solutions.

“We’re trying to grow the business organically ourselves, but we’re also out buying companies to complement our organic growth structure,” says Spooner.

Mitel posted better than forecast revenues for its third quarter, which ended on Sept. 30, 2014. Revenues for the third quarter were $272.4 million, up 102 per cent from the same period a year earlier, with revenues of $135 million. The company forecast for the fourth quarter, ending Dec. 31, 2014, is for revenues to be in the range of $290 million to $310 million.