Canadian private telephony vendor Mitel Networks has upped its presence dramatically in the US market with the $723m acquisition of Inter-Tel Inc, a rival vendor but with far less international presence.
Tempe, Arizona-based Inter-Tel is actually slightly larger than Mitel, its $458m annual revenues upstaging the Ottawa, Ontario-based vendor’s top line, which is around $350m, though Mitel is private and so does not publish exact figures. It did say, in announcing the deal, that the resulting merger of equals would result in the creation of a company with revenue in excess of $800m.
Furthermore, according to a recent study of the SMB market in the US (i.e. companies under 500 users), which was carried out by Info-Tech Research Group, Mitel had 10.6% share and Inter-Tel 8.9%, putting the combined company six percentage points ahead of the next player, Cisco, with Nortel, Toshiba, Avaya and NEC even further behind and in that order. In the UK Mitel claims the number one spot in the sub-100 market for pure IPT and number two behind Cisco in the under-500 segment.
Rather than backing into listed status through the acquisition of Nasdaq-quoted Inter-Tel, Simon Gwatkin, Mitel’s VP of strategic marketing, said it would be taking the US company private because it’s much easier to integrate two companies that way.
He would not comment on whether 1500-person Mitel would be reducing headcount now at 1900-strong Inter-Tel, however. The acquired company’s first quarter financials, published on the same day as the acquisition announcement, showed GAAP net income down 17.9% at $2.6m on revenue up 2.4% at $109.5m. Inter-Tel attributed the bottom line performance to a variety of factors, including FAS 123R expenses related to its stock option plans, performance share awards and a stock purchase plan, but also to extensive professional fees related to its proxy contest with former CEO Steve Mihaylo, who tried to buy the company last year.
On the product side, of course, there is some overlap. Inter-Tel has been around in the telecom equipment market since 1969 and still derives around 90% of its revenue from North America. It started life importing kit from Asian manufacturers after Ma Bell lost the monopoly on the equipment that could be attached to its phone lines, and by the mid-90s had moved into designing and manufacturing its own products.
The company moved into IP telephony in the late 90s, initially with an IP gateway, then in 2000 began to offer its Axxess PBX in a hybrid form, a circuit-switched PBX with an IP plug-in. Since then it has launched the CS5000, which is an IP-centric box with a BRI interface on the back. While this device can be made SIP-compliant via the addition of a separate SIP server, out of the box it runs a proprietary Inter-Tel protocol.
At the end of last year, however, it launched a new device, the NC7000, with full SIP compliance, and while the Axxess continues to sell into companies that use traditional telephony but want to go over IP to remote workers, Inter-Tel clearly saw its future as being the 5000 and 7000 product lines.
Mitel’s official line is that both product portfolios will be maintained, and Gwatkin said the combined entity will now be able to offer everything from IP-enabled to pure IPT with full integration with Microsoft’s Office Communications Server, from standard to custom applications and single- to multi-site solutions. A further new dimension for Mitel will be managed services and leasing, where Inter-Tel has a well developed business and the Canadian company is entirely absent.
One IP PBX vendor buying another tends to be a geographical play, just as when Avaya acquired Germany’s Tenovis a couple of years ago, and one would expect, over time, the acquirer to offer the acquired’s customer base a migration path across to its portfolio. As to whether Mitel will wield the ax on Inter-Tel’s staff, there would certainly appear to be a need to rationalize, on the basis of its most recent financials, though of course they are impacted particularly by the proxy battle with Mihaylo. He meanwhile may now give up his takeover bid as a lost cause, or choose to fight the deal in court.
As for the emergence of an $800m company, that’s still not a Tier-1 player against the likes of Avaya or Nortel, and even Cisco’s IPT business is already somewhat larger than that. Certainly the overall entity will be a stronger international play with a big US customer base as well as significant presence in other countries, most notably the UK, which represents between a quarter and a third of the European market in high-tech equipment, depending on the specific sector. Still, Mitel is going to have to address the challenge of maintaining two separate product portfolios, doing quite a lot of the same things on both sides, for a few years, and work out a migration strategy that doesn’t alienate Inter-Tel customers.