Mitel to acquire ShoreTel in $530M deal
Merger to produce $1.3B-a-year company, $60M in annual savings after two years
Give Mitel chief executive Rich McBee credit for patience.
Nearly three years ago he made a play for California-based rival ShoreTel but withdrew Mitel’s $8.50-per-share offer when ShoreTel’s directors demanded more.
Thursday morning he revealed ShoreTel had agreed to be acquired for $7.50 per share (all figures U.S.)
This time around ShoreTel’s directors are all on board. In all, Mitel will pay $530 million for ShoreTel’s equity. Minus ShoreTel’s cash and some other items, that translates to a net cost of $430 million. Believing its own shares to be undervalued, Mitel is paying for the transaction with cash.
“This is a natural combination,” McBee said. “We are stronger together.”
Both firms are shifting rapidly toward cloud-based technologies, which means they are selling telecommunications as a service through a subscription rather than as a hardware sale. ShoreTel’s overall revenues are much lower than Mitel’s, but a relatively bigger chunk of them, 39 per cent, is cloud-based. (At Mitel, the tally is 32 per cent.)
Assuming the deal is finalized as expected by September, the merger will produce a $1.3-billiona-year organization with 4,200 employees. It will continue to be headquartered in Kanata, where 550 employees are based. Premerger, Mitel’s global revenues were less than $1 billion annually. The company’s worldwide head count on June 30 was 3,074.
The fast-growing market in cloud services (a niche known as “unified communications-as-aservice”) was the key motivator for the deal. Pre-merger, ShoreTel and Mitel occupied the No. 4 and No. 6 spots, respectively, in global market share. Combined, the new entity will enjoy a 16-percent share, in the No. 2 spot just behind market leader RingCentral of California.
Mitel, which is chaired by Kanata entrepreneur Terence Matthews, also expects significant cost savings post-merger by consolidating R&D, sales organizations and supply chains. In sharp contrast with Mitel’s 2013 acquisition of Toronto-based Aastra, blending Mitel and ShoreTel promises to be “easier, faster, cheaper,” according to Mitel’s chief financial officer, Steve Spooner.
Part of the reason is that the two firms use many of the same contract manufacturers, and most of ShoreTel’s operations are in the U.S., in sharp contrast with Aastra, which has a large European workforce.
Spooner said annual savings should be $60 million after two years, with two-thirds of the cost reductions to be achieved in the coming year.
The ShoreTel deal — again, assuming it is finalized — should allow McBee a small sigh of relief. From the moment he took over as CEO early in 2011 he’s made it his mission to build Mitel into one of his industry’s most significant suppliers — and to do this by acquiring other firms. It hasn’t been the smoothest trajectory.
He pulled back from the first deal to buy ShoreTel because it threatened to become too rich. The same rationale applied last year when a friendly merger involving Polycom, a California video-conferencing specialist, was trumped by a bigger offer from a New York equity fund.
Then, last December, Mitel announced it would sell the mobile products unit it had acquired less than two years previously — incurring a significant writedown in the process. McBee, along with Mitel’s board of directors, had underestimated the resources that would be required to remain competitive in the mobile technologies.
In announcing the sale of the new mobile products unit, McBee said Mitel would return its focus to its longtime core of selling communications systems — either directly or through the cloud.
And that’s what brought him back to ShoreTel.