With a great fit in terms of technologies, markets and geography, the merger of Polycom and Mitel should result in a new company “with shared vision for seamless communications and collaboration”. Whether it will or note will depend on the rate of change in the market generally, technology and social / work trends (see: ‘Will VC ever get it right?’ elsewhere in this issue).
The rationalisation for the merger of Polycom and Mitel is that the communications and collaboration industry is undergoing “a period of intense change” that is rapidly “redrawing the competitive landscape and breaking down barriers between previously discrete markets and technology domains”.
This statement points to the move to mobile, the cloud and hardware virtualisation – all of which have eroded Polycom’s established ‘on premise’ business model, without necessarily replacing it with new revenue streams. Mitel, on the other hand, says it has successfully capitalised on changing market dynamics, and transformed the company to help customers operate more efficiently and cost effectively.
The partners to the transaction argue that the combination of Mitel and Polycom will create a new industry leader leveraging Mitel’s recognised leadership as a “pioneer in global communications” with Polycom’s “well-known premium brand and industry-leading portfolio in the conference and video collaboration market”.
“Mitel has a simple vision – to provide seamless communications and collaboration to customers. To bring that vision to life we are methodically putting the puzzle pieces in place to provide a seamless customer experience across any device and any environment,” said Mitel CEO Rich McBee.
“Polycom is one of the most respected brands in the world and is synonymous with the high quality and innovative conference and video capabilities that are now the norm of everyday collaboration. Together with industry-leading voice communications from Mitel, the combined company will have the talent and technology needed to truly deliver integrated solutions to businesses and service providers across enterprise, mobile and cloud environments.”
The combined global company will offer customers an integrated technology experience supported by an impressive ecosystem of partners. Key market positions include: an installed customer base in more than 82% of Fortune 500 companies; deep product integration with Microsoft solutions; mobile deployments in 47 of the world’s top 50 economies; a combined portfolio of more than 2,100 patents and more than 500 patents pending; and a global presence across five continents with approximately 7,700 employees worldwide.
Financials
It is further argued that the combined company will have a significantly larger financial platform with the scope, scale and operating leverage needed to expand in an evolving market. The financial highlights of the deal include:
- Diverse revenue base with pro forma 2015 sales of approximately $2.5 billion
- Strong cash flow generation with pro forma 2015 EBITDA of approximately $350 million
- Strengthened balance sheet with Mitel’s pro forma 2015 net debt leverage reduced from 3.8x to 2.1x
- Expected to be accretive to Mitel shareholders in 2017
- Anticipated operating synergies of approximately $160 million by 2018, driven by supply chain optimisation, facilities consolidation and economies of scale
This basically adds up to a big pot of cash and lots of people. Speaking at UC Expo. Polycom’s EMEA marketing manager Tim Stone said that the company’s plane to stick to their respective roadmaps for the foreseeable future – a somewhat concerning prospect given the changes in the social and business landscapes.
Business as usual
So what will change? Each of Mitel’s and Polycom’s Boards of Directors have unanimously approved the transaction and are resolved to recommend that its shareholders vote in favour of the transaction.
The transaction is expected to close in the third quarter of this year, subject to stockholder approval by Polycom and Mitel, receipt of regulatory approval in certain jurisdictions and other customary closing conditions. Following the closing of the transaction, former Polycom shareholders are expected to hold approximately 60% and current Mitel shareholders are expected to hold approximately 40% of the outstanding Mitel common shares.
Mitel intends to finance the cash portion of the consideration for the acquisition, and the refinancing of its existing credit facilities and those of Polycom, using a combination of cash on hand from the combined business and proceeds from new financing and has received financing commitments from Bank of America / Merrill Lynch of approximately $1.1 billion.
The technology gap
Scale is a vital part of the equation in winning a leading position in communications technology. Merger and acquisition is the fastest way to achieve scale but it’s not always successful (Lifesize / Logitech?).
Polycom, as the majority shareholder in the merged entity, and will continue to run as an independent division, but it’s hard to see how this kind of scale will benefit a vendor that lost its technology leadership positon some time ago. WebRTC is the current driver for change in collaboration, migrating real time communications technology to the cloud.
Where Polycom was once a technology, the market now looks to Microsoft and Google for innovation in areas like WebRTC. Mitel acquired its place at the WebRTC table by buying Mavenir but it is some way from being in a leadership position. In the meantime, high-end video collaboration has failed to grab the enterprise imagination (see: see: ‘Will VC ever get it right?’ elsewhere in this issue) and continues to be a tough sell.
