McBee a consolidation king: latest acquisition makes Mitel a global leader, analysts say

Buying up companies is getting to be old hat for Mitel Networks CEO Rich McBee.

But even for someone who has spearheaded half a dozen major acquisitions since taking the helm of the Ottawa telecommunications technology firm in 2011, his latest deal is a blockbuster.

Earlier this spring, Mitel announced it was paying nearly $500 million in cash and $1.5 billion US in shares to buy California-based video technology manufacturer Polycom, the sixth and by far the largest acquisition Mr. McBee has overseen as chief executive.

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The deal, which still needs to be approved by regulators and shareholders of both firms, should be finalized by the fall. When the dust settles, the new Mitel will be a $2.5-billion-a-year company with a total of 7,700 employees and operations around the world.

Fewer than 700 of those employees will actually work in Ottawa, but Mr. McBee told OBJ the city will benefit from the firm’s new heft and global reach.

“Ottawa continues to be a hotbed of technology and innovation,” he said. “I think that if we actually get our hands under the covers a little bit further, I think it will be good for Ottawa.”

Analysts applauded the deal, arguing it makes Mitel a more diversified company by adding videoconferencing technology to an already strong roster of voice and cloud products.

“From a technology perspective, they’re very complementary to each other,” said Gregory Burns of Wall Street-based Sidoti & Company. “I think putting those two together makes a stronger offering as a combined company to go to market with.”

Richard Tse, a telecommunications industry analyst at Cormark Securities in Toronto, said the transaction – the result of nearly 10 months of negotiations – makes sense in the context of Mr. McBee’s overall strategy of growing through acquisitions. In the past two and half years alone, Mitel shelled out $400 million for Aastra Technologies of Toronto and snapped up Texas-based Mavenir Systems for $560 million.

“For Mitel, I think it allows them to continue on this consolidation path that they started when they acquired Aastra,” Mr. Tse said. “Clearly, they see considerable cost synergies to be surfaced from consolidation of the industry.”

Mr. Burns agreed.

“I think a lot of the longer-term upside to this combination is going to be around the consolidation of the industry,” he said. “I think now they have a company with good scale and strong cash flow that’s going to be able to be that platform consolidator in the industry.”

While Aastra and Mavenir were smaller companies than Mitel, Polycom is larger of the two partners in the latest deal.

Before the merger, Polycom had revenues of about $1.27 billion, slightly more than Mitel’s $1.1 billion. Polycom’s shareholders are receiving a 22 per cent premium in the transaction based on stock prices as of April 5.

Mr. Burns said the Ottawa firm was better-positioned to lead the new marriage by virtue of its extensive history of absorbing companies.

“That’s something that Mitel has already been doing,” he said, referring to the firm’s acquisitions of Astra and Mavenir as “transformative.”

“In my view, Mitel’s management team is very strong. They have a track record of already executing on acquisitions and delivering a significant amount of synergies through those acquisitions. Polycom is just the next in that line.”

Mr. Tse said he is confident Mitel’s executives are up to the task of shepherding the telecom giant through its biggest acquisition yet.

“If you look at the experience they’ve had with Aastra and their ability and speed with which they surfaced the cost synergies in that acquisition, I think that should give you some comfort that this team is well-versed in acquisitions and the integration of those acquisitions,” he said.

Even though Polycom shareholders will own about 60 per cent of the company once the deal closes, Mr. McBee will stay on as CEO. Mitel chief financial officer Steve Spooner will also remain in his position and will oversee the consolidation of the two firms, which is expected to save about $160 million a year in operating costs.

Initial market reaction to the deal was far from enthusiastic – Mitel shares plummeted nearly 10 per cent after the deal was announced on and had dipped below $7 on the Nasdaq by the middle of the following week.

That didn’t deter analysts, who were still giving the company a buy rating.

“I think a lot of the upside to the deal has yet to be seen,” said Mr. Burns. “I think (Mitel) shares were way undervalued going in. Following the acquisition, I think you have a much stronger combined company with an improved balance sheet, stronger competitive position. It’s still undervalued in my view.”

Mitel is taking on about $1.1 billion in extra debt from Bank of America Merrill Lynch to finance the deal, a figure that didn’t worry either analyst.

“The absolute debt balance is getting larger, but more cash flow will cover that,” Mr. Burns said. “I would say their balance sheet gets stronger here.”

– With files from Tom Pechloff


SIDEBAR: McBee’s buys

Other Mitel acquisitions since Rich McBee became CEO in 2011:

March 2015: Mavenir Systems, $560 million

February 2014: Aastra Technologies, $392 million

June 2013: prairieFyre Software, $20 million

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