Collaboration looming threat is a catalyzer for action
There are 2 aspects to this deal and one question to be asked:
The financial aspect
The products and market aspect
And the question – Is this a confederation of 2 powers or a confederation of 2 companies looking for a solution to their problems?
The announcement itself gives us clues to the financial and market reasons that “helped” the parties in their decision to go for this deal.
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.
Financially Polycom is stronger and bigger than Mitel. This is reflected in the deal as Polycom share holders will receive $3.12 in cash + 1.31 Mitel common shares. Details still depend on exact closing terms.
Mitel’s Balance Sheet as of Dec 31, 2015 doesn’t allow them to pull the deal using their own resources as Mitel has only $91M in cash.
It does have current assets of $562M and total assets of $1,852M but these are mainly based on assets such as inventory, goodwill and other assets that can’t really be used to finance the deal.
On the liability side Mitel has total liability of $1,237M (Dec 31, 2015) so to pull this deal through, Mitel is taking more debt, $1.1B to be more specific.
Mitel does show signs of growth in revenue along the last few years as it entered new markets through acquisitions such as the one of Mavenir and organic growth but from pure financial standpoint, its income statement for Dec 31, 2015 shows operating loss of $10M and total net income loss of $20M.
Polycom shows a stronger Income statement and balance sheet for Dec 31, 2015. It closed 2015 with operating income of $87M going up from only $46M for 2014, $435M in cash and significantly lower liabilities than Mitel.
Although there is an improvement when comparing Q3/2015 with Q4/2015, year over year Polycom’s revenue was on the decline and it had to cut expenses in order to improve the bottom line. One of the expense cuts actions was the closing of the Polycom development center in Israel that employed 280 people and was a result of their acquisition of Accord Networks that developed a video MCU.
Financially both companies were in need for a change.
Polycom was experiencing revenue decline (y/y) and a need to cut down expenses.
Mitel’s biggest problem was how to accelerate revenue growth.
The Products & Market section will shed more light on how these interests meet.
Products & Market
As stated in the announcement, the communication and collaboration markets are going through a significant change. They are actually becoming one market.
This is also reflected in the Polycom Q4/2015 investor presentation reflecting their view of the future workplace.
Looking at Polycom’s sales by product category we see a reflection of the market trends.
UC group systems have declined 10% year over year. We don’t have the split between voice only and video room systems but clearly this market of large and expensive video room system is going down hill.
The personal devices on the other hand are growing and that has to do with the market trend of collaboration.
While Polycom’s UC platforms have declined year over year, the UC market itself is growing.
Adding this all up makes it clear why Polycom was looking for a vendor they can team with in order to better capitalize on their strong brand and product portfolio as well as presence of their devices in many enterprises of all sizes.
On the technology side, WebRTC is a catalyzer for the unification of these markets and a problem for device manufacturers.
- It makes it simple simpler to add communication to collaboration/messaging services (e.g. Slack)
- It further pushes the use of soft/web clients vs. HW devices
Mitel is suffering from competitors as Microsoft that has made the shift from a collaboration vendor to a vendor and service provider of communication and collaboration solutions.
Other companies such as Google and Slack with the help of WebRTC and partners are becoming more and more a viable communication provider and not just a collaboration service provider.
On the product side, there is a lot of overlap in voice devices and SW products. We will need to wait and see how these integrate and expenses are reduced. There will clearly be a struggle between the groups of these overlapping products to maintain their jobs.
What will happen with Polycom’s sales into Microsoft’s Skype for Business environment is still a wildcard.
Mitel did take actions offering a cloud service and catering for the general business and contact center markets as well as to specific verticals such as hospitality, education, healthcare and government. Apparently this isn’t enough as competition coming from the collaboration vendors is close behind them as a looming threat.
Mitel needed much more feet in the ground and Polycom was the right answer to this need. Playing it right, Mitel will be able to capitalize on this strong market presence of Polycom in the enterprise market.
The Polycom Mitel deal is a result of the need of 2 companies to improve their market position in face of competition coming from collaboration services. It is more of a merge than a classic acquisition.