ShoreTel announced on 1 February, 2012 that it was acquiring M5 Networks, a New York-based provider of hosted communications solutions for the SMB space.
I understand the motivation for M5 to sell the company - it needed access to more capital, a larger brand, and more feet on the street. I'm still trying to get my arms around what this acquisition does for ShoreTel. Where are the synergies?
In an analyst briefing, the executives of both companies stated that there is no intention of integrating the two product lines to gain some efficiencies of scale in R&D. M5 will begin deploying ShoreTel phones (in addition to its current Cisco lineup) and the ShoreTel mobility solution, while the M5 Call Conductor will likely be re-branded as a ShoreTel product. In addition, ShoreTel will make the M5 Call Conductor available to its VAR and VAD network. But is this enough synergy to justify an acquisition that took $85 million of ShoreTel’s available $115 million cash reserve plus additional stock and payouts that could total $160 million.
ShoreTel's chief executive, Peter Blackmore, correctly stated that if ShoreTel waited until it developed everything in-house, the market would have passed it by. The company has been trying to get there for at least 2 years. Unhappily, the ShoreTel premises-based PBX was not architecturally designed to be a cloud-based, multi-tenant, highly scalable platform. In addition, there are the OSS/BSS/CSS capabilities necessary for a successful cloud service that ShoreTel just didn't have.
M5 has a passion for customer satisfaction that matches ShoreTel's, and M5 has a good management team. But these characteristics are not unique to M5 in the hosted UC space.
What's left, at the end of the day, is that ShoreTel must try to grow the M5 business significantly without cannibalizing its premises-based sales. I think this is going to be slightly more difficult for ShoreTel than some of its competitors who have both on-prem and hosted offerings simply because the underlying technologies are so different. The technologies themselves compete. And, until 1 February, M5 was fearful of ShoreTel as a competitor, a mindset will be hard to shake as M5's direct sales force tries to achieve new quotas. Furthermore, we have seen that VARs and VADs that are primarily box movers may have a difficult time with the recurring revenue model. Given that these VARs and VADs will not host the M5 service themselves, but will be more like agents and local break/fix maintenance people, it is not clear that the recurring revenues from the hosted service will be as compelling to them as the premises-based sell with its attendant hardware margin and services revenue.
ShoreTel has bet the farm on this acquisition. This isn't a match made in heaven, nor is it a shotgun wedding. It is sort of a match of necessity. ShoreTel has heretofore been “the little engine that could” in the on-premises telephony market. We’ll see if it can make similar progress in the even more crowded hosted UC space.
