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Shoretel - The Final Act After 16 Years of Losing Money

Posted by Randy Kremlacek on Oct 23, 2014 9:11:00 AM

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On Monday, October 20th, 2014 Mitel made public an offer to buy phone systems maker Shoretel at $8.10 per share, a 24% premium over Shoretel’s stock price. This followed several attempts to engage with the Shoretel Board of Directors earlier to discuss a buyout, but was met with a firm refusal from Shoretel. Mitel’s offer has a deadline of November 20th, 2014.

Shoretel’s response to date has been, “Shoretel today confirmed that it has received an unsolicited proposal from Mitel to acquire all of the outstanding shares of the Company for $8.10 per share in cash.”  This has been the sum total of Shoretel’s public communications about the offer.

Why Does Mitel want to buy Shoretel?shoretel-empty-wallet-from-money-loss

There are two primary factors and one secondary factor for this takeover:

  1. Mitel can eliminate its primary US small business phone systems competitor.  They’ve stated this publicly. Shoretel sales prospects are Mitel sales prospects. The premise business phone systems business is in decline, and this is a classic play on consolidating in a declining industry.
  2. Mitel can strip much of Shoretel’s operational costs out, thus making the remaining Shoretel business profitable.  
  3. Mitel gains access to some valuable hybrid PBX/cloud intellectual property and marketing assets. 

What Can Shoretel do about Mitel’s hostile purchase offer? 

#1.  They can capitulate and accept the offer. Not likely. They have already refused this option several times, and they consider Mitel’s actions a hostile takeover.

#2.  Shoretel can try to negotiate a higher price. The word on the street is that Mitel believes that the deal is still doable at $10 per share. So, there is wiggle room for the Shoretel purchase price.  Shoretel executives can then accept the inevitable and on the way down, secure fat positions at Mitel and pack their golden parachutes while satisfying their shareholders need to cash out. 

#3.  Shoretel can send a search party to find a company that will make a higher bid for the company and provide better financial perks to management, thus thwarting Mitel’s gambit and fattening Shoretel Executive’s pockets on the way out the door. 

It’s no secret that after Mitel’s patent lawsuit against Shoretel on the eve of their IPO, they’ve not been corporate drinking buddies, so Shoretel’s attitude inevitably has to be “anybody but Mitel”.  What I wouldn’t give to hear those conversations!

What Are Shoretel’s Chances of Remaining as an Ongoing Concern:

This is entirely up to the voting shareholders of the organization. They could decide that the company has more value than Mitel is offering, and they simply refuse. Shoretel’s stock has been in the range of $3.25 and $9 per share for the past five years, with a brief spike to $11 in 2011 based upon acquisition rumors at the time. The current offer is at a 24% premium over the present stock price. The shareholders must decide if it’s time to bank the profits or stick with Shoretel and see if they can turn the corner and finally become profitable.

82% of Shoretel’s stock is owned by outside investors while insiders (i.e. Shoretel management) owns less than 3%. Thus, outside stockholders will make this decision while management watches from the sideline.

The most likely scenario is that Shoretel’s lawyers and bankers go shopping to get a higher bid and that shareholders will decide to cash out to the highest bidder. To date, the return on investment for Shoretel investors has been poor.  This offers them a tidy way out.

Will a White Knight Rescue Shoretel?

There are not many obvious suitors in the industry. The buyer would have to find a way to look past these glaring realities:

  • Shoretel continues to lose money
  • Shoretel technology is proprietary in a communications world increasingly open.
  • Shoretel has single digit market share event in its strongest market, the US.

Who are Other Potential Shoretel Buyers?

  • Cisco has abandoned the small business communications market, so this is not a match.
  • Avaya already has an excessive debt load, and Shoretel is a peanut of a company compared to Avaya. 
  • Unify (formerly Siemens) has recently done a massive product overhaul and wouldn’t have anything to gain as Shoretel’s technology is proprietary. And once again, Shoretel is too small to move the needle.
  • Small business phone systems manufacturers Panasonic, Toshiba, and NEC are secondary players in this market, and it’s hard to see any synergies gained by acquiring Shoretel. More likely is that these three companies are planning their own exits.

Shoretel is caught in the downdraft of a dramatically shrinking market for proprietary communications telephone systems. There is little attraction to investment banks other than the vulture capitalists. While there is much excitement in telecommunications today, it’s in the transformation of communications to services and applications, areas where Shoretel comes up short.

Who is in Charge of Shoretel? 

Shoretel has hired Fenwick & West to manage the legal elements of the takeover. Blackstone Advisory Partners is in charge of evaluating Shoretel’s financial options. The lawyers and bankers are determining the future of the company. 

Shoretel is in Suspended Animation

For all intents and purposes, Shoretel is frozen. If Shoretel management makes any changes that negatively impacts the value of the organization, they are vulnerable to shareholder lawsuits arguing that they are destroying company value. Day to day operations are now on auto pilot.

When will Shoretel’s Future be Finalized?

Mitel wants the deal wrapped up by November 20th. Shoretel management would love to buy time, but the shareholders have the ultimate say. If Shoretel tries to fight too hard, they run the risk of having Mitel rescind the offer, in which case it is mostly like that Shoretel’s stock price would plummet. 

This corporate screenplay could continue for a protracted period of time if other entities get involved. In the end, Shoretel will be acquired and likely by the original suitor.

After Shoretel is Sold, What Happens to Shoretel products and services?

The buyer will pick through the carcass and will keep those products that are strategically important and profitable. Since Mitel is very much like Shoretel in its product and service line, it will eliminate most of the Shoretel product line. That’s just the way it goes in corporate acquisitions. Mitel is notably further along in complying with the industry standard of SIP and has much more in-depth experience in virtualization and cloud PBX, so Shoretel equipment becomes “end of life” as they say in the industry.

What Happens to Shoretel’s Customers?

As in any acquisition of this nature, the acquiring company will make bold public statements about protecting Shoretel customer’s investments. They will also develop a road map that will show the path to move customers to Mitel products and services over time.  That’s just the way these things work. Any hopes of Shoretel products and technologies prevailing over time is Pollyannaish thinking. Shoretel support will deteriorate over time as Shoretel resellers will move on to other providers.

Shoretel Resellers’ Future

Shoretel Resellers need to immediately diversify their communications offering. Any Shoretel proposals on the table now are dead as no potential customer will purchase a product by a company who may be out of business in short order.

Shoretel Sales Prospects?

On October 9th, Shoretel had a substantial pipeline of new business deals to close. The next day, you could hear the sounds of prospect’s shredders as the Shoretel solution was eliminated.

Shoretel Salespeople Move On!

With new Shoretel sales on hold while the future of Shoretel is determined, smart Shoretel salespeople are job hunting. Waiting around while commissions go to zero is not the way to pay the mortgage.

What’s to Be Learned from Shoretel’s Demise:

This author is guilty of sounding like a broken record. The analogy to phonographs is ancient, but I’ve seen this act go back to the time of LP’s.  For the last three decades I’ve observed many times over with TIE, Rolm, Nortel, and now Shoretel, marketing, and hype overcomes common sense. In all of these cases, the buy-in has been at the IT level, usually a group known for logic and technical expertise. However, in these instances, the IT buyers become devotees and then acolytes. In their eyes, all other options become technologically inferior and doomed to the scrap heap. There is only one vision going forward…until the Trojan horse falls apart

The Kool-Aid may change colors, but ultimately, common business sense prevails, and the bright shiny objects lose their allure and with the magic gone, the company quickly fades and then folds. Shoretel will now take their place alongside the other marketing marvels of telecommunications who came before them. However, they deserve a special place for an amazing 16 years of financial losses.

 

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Topics: Premise PBX Competitors