in Mitel Telephone Systems

Mitel’s Shoretel Offer

Exciting times to be a Mitel dealer in Los Angeles. With a crowded marketplace full of Shoretel dealers banging into each other on every deal, many IT VARs, MSPs, IT and Telecom Consultants, and Telecom VARs and Interconnects are eagerly awaiting what shakes out, if anything, from the Mitel bid for Shoretel.

On October 20, 2014, Mitel (MITL) offered $540M for Shoretel (SHOR), an offer Shoretel’s board rejected. In fact, Shoretel has publicly scorned the offer as financially inadequate and tooted their own horn regarding their recent successes, giving every indication that they were fiercely independent and going to stay that way. Mitel sued them over intellectual property on the eve of their IPO, so this announcement, on the heels of a quarter where Shoretel managed to eke out a positive GAAP (Generally Accepted Accounting Principles) net income could be seen as part and parcel of Mitel habitually raining on a competitor’s parade.

Except, for one, Shoretel hired Blackstone to advise them. This offer comes on the heels of last year’s executive exodus at Shoretel and a wave of insider selling over the last 12 months – all signs that there is something odd going on. We are looking at some weird execution problems at Shoretel lately too – it took about a month to patch the HeartBleed problem on their core systems, and this is still going on – different protocols and phones for premise and cloud.

Odd choice of Phone

Cisco SIP for Shoretel Sky

 

 

 

 

 

 

 

 

This blog post takes a pretty tough stance, noting that the telecom equipment market is consolidating as businesses shift to the cloud and that Shoretel has run at a loss for 16 years in a row. I would argue that the numbers clearly show that Shoretel’s cloud business is getting some traction. The counter to that is that SHOR’s cloud business is of insignificant size compared to 8×8 (EGHT) or Vonage (VG), who combine for a billion dollars in cloud telephony revenue a year. I would add that Vonage has a gross profit margin of close to 69%, and 8×8 runs at nearly 71%. Premise manufacturers like SHOR (59%) and MITL (55%) are going to face some challenges supporting a large premise base while they pursue cloud. I think combining to wring efficiencies and scale out of their operations is going to be crucial if these old-line companies are going to compete with firms with that big of an advantage.

Since Shoretel shares are 83% held by institutional investors, it looks like the barrier to a purchase may be more about price than stubbornly independent Shoretel leadership. This article features shareholders explicit about wanting a price in the $10-12 a share range, versus the $8.10 price of Mitel’s first offer. The stock has been flat for some time, so I would imagine shareholders are excited to see some movement.

So what does it all mean for our customers? If you are considering a Shoretel system, be aware that underneath the tough talk in the press releases, Shoretel hired investment bankers and Wall Street might like to see the company sold, so they can cash out on a stock, and a sector, that has been pretty flat. I imagine Shoretel is hoping for a bidding war to drive the price up, which would be a Pyrrhic victory for Mitel if they take on too much debt, though it is hard to imagine who would want to get in the game ahead of a huge technology refresh cycle about to sweep the industry.

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