Mitel’s acquisition of Polycom has game-changing potential in UC market

Mitel’s mobile reach combined with Polycom’s voice and video solutions could give the combined company an advantage in the unified communications space

Mitel’s acquisition of Polycom has game-changing potential

After months of speculation, Mitel finally pulled the trigger on acquiring Polycom for $1.96 billion.

Competing in the unified communications (UC) market means having to butt heads with not just one, but two 800-pound gorillas named Cisco and Microsoft. The combined “MiPolycom” will be a much bigger, stronger, $2.5 billion revenue company—much more capable of competing with the big boys.

Mitel’s acquisition of Polycom is a bit of an unusual situation. Polycom is bigger than Mitel in both revenue and market cap, but Mitel was able to secure a $1.05 billion loan from Bank of America and Merrill Lynch to complete the deal. Under the terms of the agreement, Polycom will continue to run as a separate business unit under Mitel and will retain its brand. Rich McBee, Mitel’s CEO, will be the CEO of the combined organization, which will be headquartered in Ottawa, Canada.

While the two organizations both compete in the broader “UC” industry, there is surprisingly little overlap in products or market. Polycom is one of the leaders in videoconferencing solutions and SIP-based phones used primarily by internet telephony service providers (ITSP) and with Microsoft Skype For Business (SFB), formerly known as Lync). Mitel has a more traditional UC approach and offers a complete line of products, including its own call control.

With Mitel’s previous acquisitions of Aastra and Mavenir, the company has made a strong pivot towards the cloud, an areaPolycom lagged in. Polycom has historically been a large enterprise provider and has recently been moving down market. Mitel cut its teeth with small and midmarket companies but has recently been moving up market. Polycom is strong in Asia, whereas Mitel has strength in Europe. Other than having an overlap in IP phones, the two companies fit together well, so the integration between the two organizations should be smooth.

The financials behind the acquisition are fascinating. Mitel has been an acquisition machine since McBee became CEO in 2011. Although the company had to borrow roughly $1 billion to finance this new deal, its balance sheet is actually stronger. Prior to the acquisition, Mitel had a net debt leverage of 3.8x, which has been reduced to 2.1x because Polycom had so much cash in the bank. In a way, Mitel used Polycom’s cash to finance the deal. Because the debt leverage has been reduced, Mitel can continue to be aggressive with M&A activity to add adjacent products to its portfolio.

Game-changing potential in the mobile arena

The combined organization should see a number of other benefits that are typical of acquisitions, including cost reductions from overlapping functions and leveraging each other’s customer base and channel partners. In this case, though, the coming together of Mitel and Polycom has game-changing potential, particularly in the area of mobile.

Last year, Mitel acquired Mavenir Systems, a vendor that sells software-based solutions directly into mobile operators and is deployed in well over 100 mobile networks today, including 47 of the top 50 economies. Mitel bought the company to shift to a mobile-first strategy. The concept of mobile first is certainly nothing new, and many UC vendors claim to have this positioning. However, Mavenir gives Mitel the assets that are deployed deep in the network instead of as a pure over-the-top solution.

Polycom, meanwhile, has a history of providing high-quality voice and video experiences. It’s SoundStation conference phones offer best-in-class audio quality, and anyone who has participated in a Polycom video call (or watches Dr. Phil) understands the quality of Polycom video. However, the entire UC industry has lagged at building voice and video solutions that work well over wireless networks. Polycom and Mitel together could solve this in the network instead of having to rely on over-the-top optimization.

Also, Polycom has some unique features, such as acoustic fence, that greatly improve the quality of audio and video in noisy environments. This technology could be used to bring high-quality communications to places where audio and video have always struggled. For example, if you have ever tried to make a phone call in Starbucks, you know how the background noise can make it impossible to talk to someone. Audio fence completely blocks that out. This technology could be applied to areas such as factory floors, stadiums, oil fields and a number of other areas.

The UC industry has gone through a fair amount of consolidation already partially due to Mitel. But many of those acquisitions are done purely to consolidate share and reduce the number of vendors. Polycom and Mitel together have great potential to change the industry.

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Copyright © 2016 IDG Communications, Inc.