Polycom Gets a Better Offer

by Dave Michels

Three months ago Mitel and Polycom announced their engagement. It was one of those deals that you had to focus through the left side of the brain to appreciate. The synergies were questionable, but Mitel got Polycom to agree to 1) be acquired and 2) a mostly stock deal. Polycom didn’t have a lot of options, and Mitel was getting it (and Polycom’s cash) at a good price.

MarriageThen, on Friday Polycom announced its intent to take another deal from Siris Capital – a deal that was 1) all cash and 2) a higher valuation. Because of the agreement already in place, Polycom has to pay Mitel a $60 million run-away bride penalty for leaving Mitel at the altar. Polycom will be a private, stand-alone company.

Technically, the break-up caught me by surprise. I was confident of a break-up a few weeks ago, but had concluded just last week that the Mitel-Polycom deal was inevitable as Polycome didn’t have a lot of options. Siris made an offer, but it didn’t appear to be realistic.  The deal got better. Now I think the divorce is actually great for both parties. Here’s why:

Mitel Wins

  1. Cash: Mitel gets $60 million dollars. Even with all the time they’ve put into this, they likely came out ahead (assuming they didn’t use McKinsey).
  2. Notoriety. Mitel has made it clear it intends to be the industry consolidator for some time. Aastra, PrairieFyre, Oaisys were all chump change. ShoreTel said no, Mavenir was a pivot. Going after big fish Polycom was sexy. Sure it didn’t happen, but if it had it was the deal of the century for Mitel. The dumb bet is Mitel will now go after ShoreTel, but I bet Mitel is still thinking big. I wouldn’t be surprised if Mitel goes after Avaya – what’s stopping them?MitelPoly
  3. Valuation: On Friday Polycom spiked nearly 13 percent, and Mitel jumped nearly 20 percent. The Wall Street bean counters finally figured out what the industry analysts knew from day one – that the synergies were dubious at best. Consider this June 8 Bloomberg graphic that predicted revenue growth. Everyone knows that combinations reduce costs, but revenue growth is not so obvious. Most industry analysts were concerned that the combination could cause Polycom’s revenue to crater. Polycom was a neutral party, working with multiple UC companies, and becoming a competitor has consequences. Eventually the bean counters figured this out and stock prices of both companies began to drop. The lack of confidence complicated matters because Mitel was to mostly pay for Polycom with stock.
  4. Rich McBee. The deal fell apart, but not because of anything Mitel did. If anything, Mitel CEO McBee comes out of this stronger. Both boards approved the deal, and McBee was to be the surviving CEO. Mitel had rights to match the Siris offer, but McBee stuck to his valuation.  WHen the deal of the century turns into full retail, it’s time to close the checkbook. Mitel likely recouped its investment with the $60 million penalty. McBee’s and Mitel’s stock are up without even having to execute on the (risky) combination.

Polycom Wins

  1. Microsoft: I bet this near acquisition will cause Microsoft to renew its vows with Polycom. Sometimes we don’t appreciate what we have until we (almost) lose it. Polycom has been a loyal dedicated partner – arguably at the detriment of its own business. Polycom provides Microsoft both phones and video solutions. The Polycom phones are the best available for Skype for Business – the runner-ups are far behind. The video story is more complex, but mostly because of Microsoft. Aastra/Mitel, Snom, Crestron, Logitech, Smart, Yealink, HP, LifeSize, and others – have all been encouraged by Microsoft to compete against Polycom, and none of these relationships have provided Microsoft the same commitment as Polycom. Microsoft even introduced its own Surface Hub that directly competes against Polycom. Microsoft likes its partners all-in and hungry. A Mitel-Polycom merger was complex. Microsoft needs Polycom, but does not do well with partners that are competitors. Now we have a redo opportunity. Perhaps Microsoft will make some changes that allow Polycom to better benefit from its loyalty.
  2. Private: It’s the in thing – going private – and it is often considered necessary in order to re-invent. Polycom needs re-invention. Polycom is woefully behind on interop and the cloud. Cisco, Pexip, Blue Jeans, and Vidyo all have pieces that are ahead of/and superior to Polycom. Though Polycom has been turning it up recently, it could do so much more without the pressure of being public.
  3. Innovation: Polycom has an incredible arsenal of people, patents, and customers. Now they have a genuine opportunity to become an industry leader once again.
  4. Peter Leav. Peter inherited a mess – Gerald Ford had it easier. Despite the mess, he managed to get the company profitable and innovative again. Peter was to be out with the Mitel merger. It isn’t clear yet if he will (or wants to) stick around with Siris, but if he does leave at least he won’t be remembered as the last Polycom CEO.