Mitel Going Private, Managed Services Giant with Rackspace on the Horizon?

Mitel is once again in the news.  The 45-year-old communications provider has been on the buying end of multiple transactions in its quest to transform itself from a legacy to a modern provider.  Most recently, it bought ShoreTel in an effort to drive its momentum in the UCaaS space.  Now, it is on the other side, having just announced it has agreed to be purchased by private equity firm Searchlight Capital Partners.

Mitel CEO has made it clear the company, traditionally known as a competitor to Cisco (News - Alert) and Avaya in the VoIP world, has its sights set on transforming its business in response to the move to cloud-based and managed services.  That, of course, was the motivation behind the ShoreTel (News - Alert) acquisition, which boosted Mitel into second place in a highly competitive cloud communications market, behind RingCentral. 

Despite the momentum Mitel has been seeing, striking deals with many prominent organizations, including Major League Baseball and the English Premier League’s Hottenham Hotspur, the transition to a full software and managed services model was taking longer than the competitive market would allow.  As a public company, decisions tend to take longer and profitability has to be the key driver.  A shift in focus from hardware to software isn’t an overnight feat and shareholders are rarely willing to wait out a dip in profits, regardless of long-term potential.

Cisco’s recent acquisition of BroadSoft certainly didn’t help, as it gave one of Mitel’s traditional competitors a new lifeline in the market.  With Cisco, Microsoft (News - Alert) and a host of pure UCaaS players, there’s little room for maneuvering slowly.  The $2B sale (a little more than what Cisco paid for BroadSoft) to private equity, it’s a win-win.  Shareholders get $11.15 per share, a 24 percent premium to the 90-day average stock price, and more than the company’s one- and three-year highs.  Company leadership gains the ability to make strategic decisions that will reduce transition time to a full-blown recurring revenue model.

Mitel co-founder and chairman Sir Terry Matthews (News - Alert) noted, “Mitel has succeeded for 45 years because of persistent innovation and relentless focus on delivering shareholder value. Our Board determined that this transaction, upon closing, will deliver immediate, significant and certain cash value to our shareholders. We believe this transaction will provide Mitel with additional flexibility as a private company to pursue the company’s move-to-the-cloud strategy.”

That flexibility presumably includes an ability to leverage the assets of another Searchlight acquisition, Rackspace (News - Alert), acquired back in 2016 when it, too, sought to invest its resources in the managed services model.  As customers move further up the stack with their managed services needs, the combination of Mitel and Rackspace creates a massive converged services player, combining communications, security, enterprise applications, and IT services – a one-stop shop for all your business services needs.

This is more than a UCaaS play, and it’s more than just a Mitel play.  It positions the two companies as an all-in-one cloud managed services play that could easily see a new dominant force in the managed services market.