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Mitel and Aastra Merger: Market Impact and Implications

11 Nov 2013 | by Elka Popova
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Today, November 11th, 2013, Mitel and Aastra announced plans to merge. Details of the transaction are available in this press release. Here are some of the highlights:

  • Aastra shareholders receive 3.6 Mitel shares and US$6.52 in cash for every Aastra share.
  • The cash and stock transaction has been valued on closing at approximately CAD$392M. Using the Mitel closing common share price on November 8, 2013, this amounts to CAD$31.96 per Aastra common share.
  • Proforma company ownership will be as follows: 57% Mitel shareholders, 43% Aastra shareholders.
  • The new entity will retain the Mitel name.
  • The combined revenue of the two companies is currently about $1.1 billion. The combined installed base is estimated at 60 million end users.

Why it Makes Sense

Increased Market Power

The company expects to generate cumulative synergies of about $50 million over the course of the next three years. The merger will also make the new Mitel a much more powerful global vendor with leadership in the following areas:

  • the largest provider of enterprise communications platforms in Western Europe
  • the third largest communications platform vendor in terms of installed users after Avaya and Unify
  • the third largest vendor in terms of IP PBX licenses shipped
  • the third largest vendor in terms of IP phones shipped
  • one of the top two vendors in the Canadian market

Greater Ability to Address Industry Challenges

Overall, the merger is a logical and somewhat anticipated move in view of the current state of the industry. Growth rates in the mature enterprise telephony systems market have declined. The weak global economy of the past five years combined with a profound transformation of the communications industry are presenting major challenges to enterprise telephony and UC vendors. With few greenfield opportunities available market participants are turning to each other’s customer bases for growth and market share gains. Vendors must revamp their competitive strategies to ensure long-term survival and growth.

One of the key trends in the telecom industry is the migration to software-based solutions and the resulting proliferation of advanced, IP-based communications tools. Furthermore, previously siloed communications technologies are now becoming much more tightly integrated with productivity and business-process software and are thus becoming ever more critical enablers of operational efficiencies and business agility. As a result, the pace of technology innovation has accelerated and is challenging vendors to continually expand and enhance their portfolios in order to stay competitive. Greater choice and intense competition have given customers more power in the purchasing process, forcing vendors to be more creative with how they position and price their solutions. This has put considerable pressure on vendor resources and many have struggled to maintain profitable growth.

An important facet of the larger industry shift to software-based solutions is the growing migration to cloud communications. Customers have gained considerable awareness of the benefits of cloud business models and are actively exploring hosted IP communications as a viable alternative to existing premises-based implementations. Vendors in the stagnant premises-based telephony market are compelled to explore growth opportunities with the cloud delivery model and have launched multi-tenant and multi-instance solutions for customers that wish to outsource their communications infrastructure. Going forward, the cloud communications market will represent the new battleground for communications vendors.

The new entity will have greater market power to address industry challenges. The combined solutions portfolio will offer business customers a larger choice of communications capabilities including telephony, messaging, mobility, contact center and video. In spite of a certain overlap in core telephony offerings, each company also offers some unique capabilities. In the mobility space, for example, Mitel provides some advanced and differentiated hotdesking and mobile UC capabilities, whereas Aastra brings a strong DECT phone portfolio to the table. Mitel offers advanced desktop UC capabilities, whereas Aastra has focused on video. Mitel is also particularly strong in UC server virtualization and has some unique desktop virtualization capabilities. Both companies have compelling contact center solutions, which are likely to provide them with new growth opportunities.

The combined installed base offers considerable opportunities for customer migration to IP telephony and adoption of advanced UC applications such as presence, mobility, video and so on. An expanded channel network of about 2,600 partners is likely to enable the company to more effectively upsell and cross-sell the installed base and reach out to new customers.

Mitel’s growing cloud business and Aastra’s emerging cloud partnerships are also likely to boost the new entity’s competitive positioning. Enterprise communications vendors are using their multi-tenant and multi-instance solutions to both defend their installed base and attract competitors’ customers that are looking to outsource their communications capabilities. Mitel has been quick to capitalize on this opportunity with the MICD and vMCD offerings and a range of delivery models including retail sales through NetSolutions and various partnerships with third-party service providers and resellers. Higher growth rates in Mitel’s cloud business can help compensate for declining growth rates on the premises side.

Financial strength and fiscal discipline are critical for communications vendors’ survival and growth in the present market environment. The new entity expects to be able to de-leverage its balance sheet, which is likely to free up resources for R&D, marketing and sales and improve the vendor’s overall health. Both companies have also focused on margin expansion and cash-flow generation through product cost reductions, operational efficiencies, shifting to higher-margin products, improved service gross margins and headcount reductions.

Potential Challenges

As with any merger, the new entity will have to address a number of internal challenges including portfolio redundancies, business process optimization, cultural differences, etc. Typically, such mergers and acquisitions take away from the company’s focus in other areas—such as R&D, sales and marketing—and slow down growth for a certain period of time even with the best of execution. This may leave the company vulnerable to attacks from other market participants, who are likely to seek to take advantage of Mitel’s temporary weakness.

In the long run, the vendor will have to address some external challenges as well. Other vendors have focused significant resources in potentially highly competitive areas such as collaboration, social networking and communications-enabled business processes (CEBP). Furthermore, some of Mitel’s competitors, such as Cisco, for example, have already gained considerable traction with their cloud solutions and others are ramping up quickly making the cloud space a more level-playing field for everyone. Finally, Microsoft Lync is having a disruptive effect on the market due to its compelling desktop UC capabilities, including tight integration with other Microsoft solutions, and the company’s sheer market clout. Mitel’s long-term success will depend on how it manages to further enhance its communications portfolio and offer a unique value proposition in both the premises-based and cloud markets.

Conclusion

The Mitel-Aastra merger is likely to help improve the new entity’s competitive positioning and have a positive impact on the overall industry health and viability. However, the company’s ability to leverage this strategic move for long term competitive advantage will require effective internal restructuring and a creative market-facing approach.

 

                              

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