The ShoreTel hurricane (the fancy S looks like a hurricane to me) acquired Agito Networks for $11.4 million. Announced on Thursday October 21, 2010, the deal has only recently gained some traction in the trades.
This is the second acquisition between two companies that we’ve reviewed in mobile UC (the other being Nortel and Avaya) and reflects a movement towards continuing consolidation in the IT sector as companies with cash contemplate their growth plan for the economic recovery and post-recovery periods. As we’ve written many times, gaining strength through acquisition of market share, revenue generation and business operations talent through the end of a recession is a common and important tactic.
ShoreTel and Agito are different than that however. Products are not substitutes and are for the most part complementary. This deal strengthens ShoreTel’s mobile UC story significantly and gives them an answer for the continuing decline expected in the phone operations. ShoreTel’s proprietary desktop phone business faces significant pressure as fewer and fewer customers are willing to shell out $500 for every user as they might have been five years ago. IT managers know that users are increasingly mobile and won’t appreciate the fixed location device much let alone use it.
Channels are slightly different so there will be opportunities to Agito-ize ShoreTel channel partners particularly as the Agito product is tuned for unique ShoreTel features or advantages. Agito channels are already resellers of IP PBXes (Cisco and others) and probably won’t look to replace that line having probably invested far more money and effort to develop their skills in reselling the IP PBX than in reselling the mobile router. This may be some wishful thinking on the part of ShoreTel, but aggressive recruiting by ShoreTel of Agito channels is expected. Furthermore, this could have the reverse effect since some Agito channels won’t believe that the combined company will service their brand of IP PBX as strongly as they would as an independent company, which may create an opening for leaders among Agito’s still-independent competitors.
Customers, however are going to be a challenge. ShoreTel prides itself on serving the MidMarket which for the most part, according to our research have not been particularly strong at adopting mobile UC. From what I can see in the announcement materials, both Agito and ShoreTel are going the industry-solution-specific route when it comes to mobile UC. Focusing on the specific campus-style industries like healthcare and education will do the combined company a lot of good.
Here’s the Brockmann Deal Report Card:
Strategic Fit – 4/5.
Mobile UC should be on every UC vendor’s shopping list. Not only is it a required feature set for new UC installations, but it is the only way to offset the decline in IP phones that businesses will be purchasing going forward. This market evolution is a threat of course to Polycom who supplies IP phones to lots of manufacturers (not ShoreTel), but especially so to any UC vendor that sells their own IP phones.
UC-vendor independence was an advantage for Agito who marketed their solutions strongly to Cisco UC channels. It may be that Agito will going forward continue to operate semi-autonomously to maintain the illusion of independence. And it may be that Cisco will terminate Agito’s membership in the Cisco Technology Development Program, which would significantly harm the prospects for addressing the Cisco market for Agito. Regardless, the development of a more tightly integrated ShoreTel mobile UC solution will be necessary to offset any opportunities lost to the loss of Agito independence.
Timing – 5/5.
ShoreTel is still losing money. We estimate that the $11.4 million price tag is about dollar for dollar for the VC investors. It may be in some combination of stock and cash, which suggests that the VCs hope to experience a positive return on the capital appreciation of the combined company. Otherwise, it represents a 10% cut in ShoreTel cash holdings – a big cash drain with limited revenues (estimated $5 million/year) to show for it. No doubt the upcoming ShoreTel investor’s conference call will reveal all.
Customer Demand – 5/5.
ShoreTel customers want mobile UC as part of their ShoreTel system solution. It is the future of communications.
Potential – 3/5.
As unique and exciting as the feature set of mobile UC is, mobile UC will not significantly add to ShoreTel revenues. It will offset losses as a result in the decline in IP phone sales. It will help ShoreTel will deals that they would otherwise lose to Avaya or NEC. It differentiates them from the Cisco/RIM MVS solution. Note that Avaya considers mobile UC an entitlement (ie, free) which may end up being ShoreTel’s meet’n’win strategy against Avaya.