Vertical and Fulton Merge

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From the stranger than fiction department, Vertical Communications and Fulton Communications merged. The new company will operate as Vertical Communications with Fulton continuing to operate under its existing brand through the integration period.

Vertical will continue to sell and support Fulton’s existing multi-vendor product portfolio making it both a manufacturer and third-party dealer of competitive solutions – at least for now.

Vertical Communications is itself a result of mergers and acquisitions. Headquartered in Santa Clara,  Vertical is a privately held company with significant backing from LG. The portfolio includes lineage from Artisoft, Vodavi, and Comdial.

Vertical has been winning in verticals such as retail – CVS (including prescription refill), Pizza Hut, and Macy’s as well as government and education. The company has been shifting toward a direct sales model, and evidently felt acquiring a dealer was a great way to speed things up. Fulton has offices in Washington, DC; Florida, Ohio, Tennessee, Missouri, Texas, Colorado, and Arizona.

Vertical sells via direct and indirect channels (currently about 50/50). Fulton is its biggest channel partner. Peter Bailey, CEO of Vertical, expects to see direct sales increase to 75% of total sales. Building a direct force takes time and carries a lot risk. So, one could see this acquisition as a fast path to a direct model.

Fulton is a multi-vendor channel partner, and sells a lot of Mitel in particular. Fulton was featured on stage at the last Mitel Business Partner event and has won several sales awards from Mitel. Fulton’s revenue numbers on Mitel are greater than on Vertical. However, the traditional channel is getting squeezed with commodity hardware, softphones, and cloud services. One could look at this as a channel partner looking to shift its business model up the supply side.

This acquisition creates a problem for Mitel as one of its better channel partners just became a competitor. There are overlaps between Vertivl and MItel, particularly with the MiVoice Office solution aimed at SMB. When Peter Bailey referred to these overlaps, he commented that Vertical will [now] make sense in a lot of these cases. This could be seen as a targeted acquisition to flip a large base.

Fulton CEO Ben Tredway is about 57, and has been hawking small phone systems for his entire career (and has two knee replacements to prove it). He ran Fulton for about 10 years, and held senior positions at Inter-Tel and Executone over the 25 years before that.  This could be seen as a channel exit when there’s not a lot of buyers. Though not necessarily for Tredway himself as he agreed to run the direct sales team.

It’s an interesting play on industry consolidation which has mostly been like-businesses or complementary businesses merging. It’s a dangerous acquisition for Vertical because Fulton’s valuation was likely determined as a function of revenue, and with that Mitel revenue at risk the valuation is rocky.

Vertical is swimming upstream with the desire to build out its direct model. Most UC vendors prefer channel over direct right now, but there’s risk with indirect channels. The end user relationship generally lies with the channel partner, so even if the channel partner-vendor relationship changes, it’s hard for the manufacturer to intervene. This is one benefit of the Microsoft model that separates software licensing from service.

Within the channel, Fulton’s competitors will see this as an opportunity for them. The acquisition playbook calls for some heavy recruiting of both technicians and customers. MItel will indeed lose some end users, but will also likely see new commitment and diversification from its channel.

It probably makes sense for Vertical to go direct. It doesn’t have the name recognition to thrive in the channel, yet it does have a strong story with marquee customers. It will be interesting to see what becomes of Fulton’s portfolio over time.

Dave Michels