Mitel Networks' CEO Rich McBee: Size Really Does Matter

Though ShoreTel Inc. (SHOR) has rebuffed his $540 million acquisition offer, Mitel Networks Corp. (MITL) chief executive Rich McBee is adamant that consolidation is coming to business phone, conference and communications providers, and quickly.

"When you look at the demographics of our market, it's a consolidating market," McBee said. "Size really does matter."

Mitel itself has done four deals in the past year. Meanwhile, Vonage Holdings Corp. (VG) said earlier this month that it will pay $114 million for Telesphere Networks Ltd. China Huaxin Post & Telecommunication Economy Development Center purchased Alcatel-Lucent SA's business communications arm for €202 million ($250 million) in October. Avaya Inc. bought Nortel Networks Corp.'s enterprise services business for $475 million in 2009.

It is a fragmented field. A report from technology research firm Gartner Inc. over the summer put the number of unified communications-as-a-service companies at more than 100.

"Eventually a big market consolidates down to the big three," McBee said, noting that smaller, niche players would remain.

Mitel and ShoreTel offer a mix of on-premise telecom hardware and software and cloud services.

McBee said that Mitel added 49,000 recurring cloud lines in the most recent quarter, while ShoreTel added 9,000. "We're an order of magnitude bigger in terms of our cloud business," he said.

Mitel made a public bid of $8.10 per share in cash for ShoreTel in October. The offer expires on Nov. 20. "ShoreTel is an attractive asset for us," McBee said. "It's not a must-have asset."

ShoreTel declined to comment Friday. When it spurned Mitel in October, ShoreTel said the bid "significantly undervalues" its business. Further, the target called the move an "opportunistic offer ... to acquire ShoreTel just before its most significant new product launch."

In response to the bid, ShoreTel retained Blackstone Advisory Partners LP and Fenwick & West LLP.

McBee said that the company has not engaged in talks, though. "We stated a value, we fully expected to have a conversation about value, if there was something we didn't see, some asset we didn't know," he said.

Mitel based its bid on public information and comparable valuations of other companies.

"We had hoped to have a dialog and if its warranted we would make a bid that included that added value," McBee said. "But we got nothing. That's kind of frustrating."

McBee said he expects consolidation to happen first among the on-premise hardware and software providers, and then among the cloud players.

During the company's earnings call Thursday, McBee said that cloud multiples have dropped from 5.6 times Ebitda to 2 or 2.5 times Ebitda.

M&A is so central to Mitel's plan that the company has a standing integration management office to incorporate acquisitions."It's not, OK, here's an acquisition, let's pull the team together," he said.

Mitel has made four deals in the past year or so. The biggest, the $470 million purchase of Aastra Technologies Ltd., closed in January.

Mitel paid $5.9 million for Oaisys in March and $20 million for prairieFyre Software Inc. in June; both targets are contact call center suppliers. It also purchased Telepo. The company has the resources to do one big deal and a number of small deals a year.

"We're not afraid of leverage," McBee said. "If we use leverage, we want to make sure that we have the cash to pay that leverage down relatively quickly."

In the case of Aastra, he said, the company has paid down $25 million in debt twice within the first year, from excess cash. He said that Mitel has also increased synergies from $50 million to $75 million.

Because ShoreTel is focused in North America, he said, finding savings and other benefits would be "more simple." While the ShoreTel situation has become "a little public" since Mitel announced its unsolicited offer, McBee said that talks typically have been more private.

"For us, it's a little bit like, gosh darnit, just talk to us," he said. "We're reasonable. If we don't have an agreement on the value, we'll be gone."

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