UPDATED: Mitel accelerates move to cloud with ShoreTel acquisition

The plan is to rationalize and simplify the portfolio, although there is no rush to settle on a common platform. There is also relatively little channel overlap, so no need to rationalize the number of partners.

Mitel CEO Rich McBee

Ottawa-based unified communications vendor Mitel has continued its aggressive acquisition strategy.  Foiled in their efforts last year to acquire Polycom when a venture capital firm jumped in at the last minute and paid Mitel a large amount of money to go away, the company has since acquired Toshiba’s unified communications business, and now has culminated a long off-and-on series of negotiations by announcing the acquisition of SMB-focused ShoreTel.

The deal is for $7.50 per share, a total equity value of approximately $530 million. It represents a 28 per cent premium to ShoreTel’s closing share price on July 26, 2017, so Mitel isn’t getting fire sale value here, even though they are paying less than the last time they made a bid for the company. They expect the deal to close by the end of September.

“This is a natural combination coming together at the right time that makes us stronger together,” said Rich McBee, Mitel’s CEO, in a conference call announcing the deal. “We are seeing a fundamental shift in the market. In the first half of this year, there was a fundamental shift by customers towards UCaaS – a noticeable move upmarket from the SMB sector where it first took root. This market shift made renewing our discussions with ShoreTel well timed.”

The ShoreTel acquisition more than doubles the size of Mitel’s UCaaS business, and moves Mitel into the number two position overall in the UCaaS market. Their recurring revenues move from 32 per cent to 39 per cent with the deal.

“With the acquisition of ShoreTel, we are accelerating our cloud UCaaS strategy,” McBee said. “We are hitting the sweet spot of a growth market with rapidly expanding customer demand.”

Mitel’s cloud business was up 10 per cent in the second quarter, in contrast with their on-prem business which was down, both in product sales and the attached services revenues. Seventy per cent of these cloud deals bring in new logos. Even more significantly was the closing of large enterprise deals of the type which had always been CAPEX deals in the past.

“This strong UCaaS presence in the second quarter included larger cloud deals – customers with multinational business operations,” McBee said. “Because we are stronger in the midmarket and the enterprise, this is a competitive differentiator for us as the cloud moves into the enterprise.” The enterprise deals are longer term – typically five years – and are stickier as a result.

The plan is to rationalize the portfolio to remove duplication, although they indicated that compared to their 2014 acquisition of Aastra, this one is much simpler. McBee noted that deal left them with 18 different systems, which was tantamount to 18 different companies, many of them in European standards. This one is much simpler, and is much more North American-based.

“We will rationalize and simplify the portfolio,” McBee said. “We will keep the products which are the simplest to use and the simplest to maintain, for both ourselves and our channel partners. We will be able to use our global network, and in many cases use ShoreTel solutions for that.”

The company did not indicate whether the Mitel or ShoreTel platform will become the standard going forward, but they indicated that customer contracts mean that they are in no rush to make that decision.

“We have three to seven year contracts with customers on their platforms, and our policy is customer first,” said Steve Spooner, Mitel’s CFO. He indicated that underneath the hood, the engineering strategies of the two companies were similar going forward in any event.

Spooner also noted that Mitel has no plans to goose on-prem customers along in their move to the cloud.

“We don’t have to push the migration of on-prem solutions,” he said. “Customers are doing that on their own. The market is moving to the cloud. We don’t have to take them to the cloud.”

ShoreTel’s own transition to the cloud had some bumps along the way. They were a pure on-prem player who acquired a cloud component, and found some challenges in successfully integrating them until ShoreTel Connect, the integrated product, finally emerged. The key thing here from Mitel’s perspective is that that heavy lifting has been completed.

“It’s very hard for companies to make the on-premise to cloud transition,” said Todd Abbott, Mitel’s EVP of Global Sales. “Since ShoreTel made their cloud acquisition, they made the investment in integrating it, and have now made that transition to cloud. The magical tipping point is that 50 per cent mark, and they are very close to reaching that tipping point of having 50 per cent of their business cloud. That’s why they moved their whole on-prem business to ScanSource.”

While the acquisition of ShoreTel’s big customer base is a critical part of the deal, Abbott stressed that Mitel isn’t simply buying customers here.

“We think there is some good technology in that portfolio,” he said. “We have identified some of their technology as significantly enhancing what we have, and we will say more about that once the deal closes.”

Abbott also said the ShoreTel on-prem business also has value to Mitel.

“We embrace on-premise,” he said. “It will be around for a long time. While some organizations at both the low end and high end of the market are switching completely to cloud, we think hybrid strategies will be more common. We also enter this deal, as we did with Toshiba, understanding what the install base is, and assessing how many we can retain and move into the cloud.”

Finally, while Abbott acknowledged that almost every IT company making an acquisition emphasizes the strong cultural fit between the companies – something that is belied by the fact most acquisitions are not successful – he said there really is a strong cultural fit here.

“The cultural fit between the companies feels very good,” he said. “We can see the difference from when we acquired the Toshiba business. Toshiba was less of a fit. In fact, they had a totally different culture from ours. But that was a comparatively small transaction, which makes it much easier to overcome that. ShoreTel’s culture is similar, which greatly increases the changes of the acquisition being a successful one.”