Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Mitel Networks and Polycom -- two providers of video conferencing and other telecommunications equipment and software -- appear to finally have each other on speed dial. 

It's been roughly five months since Elliott Management disclosed active stakes in the companies and called for a "compelling" combination of the duo. They're now in talks to merge, according to Reuters. Mitel reportedly made the approach, and while the company's $860 million market cap pales next to Polycom's $1.5 billion, its move isn't too surprising: Mitel has been saying it wants to be a leader as the industry consolidates.

Already, Mitel has been the more acquisitive of the two. It has spent nearly $800 million on M&A in the past three years, while Polycom has been more focused on buybacks. And last month, Polycom's chairman stepped down from his post. 

Finding a Connection
Mitel, the smaller of the two companies, has outperformed Polycom on a normalized basis.
Source: Bloomberg

What's interesting is Wall Street's reaction: Mitel rose as much as 7 percent while Polycom added as much as 2.7 percent, before both pared gains in afternoon trading (Polycom more so).

As well as uncertainty around whether an appropriate deal structure can be reached, some investors may be questioning whether Elliott's estimated cost synergies of $100 million to $150 million can be achieved. Both companies have Ebitda margins of roughly 13 percent, so without such savings, the benefits of a merger are questionable. 

And even though the combined Mitel-Polycom will be a stronger competitor to the likes of Cisco (whose 2017 revenues are forecast to exceed $50 billion, 20 times that of the combined company), a merger may do little to help it combat continued pricing pressure and maintain, let alone gain, market share.

Bigger as One
A deal would lead to combined revenue of roughly $2.5 billion in 2017.
Source: Bloomberg

If a deal does get done however, it may beget more deals.

As part of its consolidation pitch, Elliott said in October that the combined Mitel-Polycom should also buy other rivals including ShoreTel (which Mitel attempted to acquire in 2014, to no avail). That's a transaction Mitel said it's willing to revisit if the price is right but Elliott seems to have cooled on the idea. The fund dumped its ShoreTel stake in the quarter ending Dec. 31, likely because the stock climbed over $10 for the first time in four years, a premium to Mitel's sweetened 2014 offer of $8.50 a share.

But when it comes to Mitel and Polycom, Elliott has dug in its heels, with stakes of 9.6 percent and 6.6 percent, respectively. Even if a deal is consummated, it's likely to stick around. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net