Why going private should help grow Mitel cloud

A private equity firm plans to acquire Mitel for $2 billion in the second half of 2018. The move should give the vendor more flexibility, as it pushes adoption of Mitel cloud.

At the outset of 2018, Mitel said it was well-positioned to capitalize on a large install base and diverse Mitel cloud portfolio to make recurring revenue account for half of its business by next year.

Becoming a private company -- as Mitel revealed last week that it planned to do -- should help the vendor achieve that goal, analysts said. Pending regulatory, court and investor approvals, an affiliate of the private equity firm Searchlight Capital Partners plans to acquire Mitel for $2 billion later this year.

For legacy vendors like Mitel, there are short-term costs associated with pivoting to the cloud. Those vendors are now selling monthly cloud subscriptions at a fraction of the cost of on-premises hardware -- a business model that sours short-term balance sheets en route to long-term profitability.

Searchlight's acquisition of Mitel will relieve the short-term pressure of publicly reporting quarterly earnings, as it seeks to prevent pure-cloud players like RingCentral and 8x8 from poaching any more of its small and midsize customers, while also competing to eclipse Avaya in the enterprise unified communications (UC) market.

"Investors are not always able to see the long-term perspective, but rather get influenced by short-term revenue and profitability trends," said Elka Popova, analyst at Frost & Sullivan. "The private status will allow [Mitel] to take certain risks and make bolder choices that are expected to produce better outcomes in the long term."

Private equity investment accelerates Mitel cloud strategy

Mitel has been among the most aggressive legacy UC vendors in positioning itself to pivot to the cloud. Last year, the company bought Toshiba's UC assets, expanding its install base, and acquired ShoreTel, giving it a broad mix of private and public clouds.

Along with RingCentral and 8x8, Mitel is now among the top UC-as-a-service providers worldwide, with 1.1 million public Mitel cloud seats. The company has a total of 70 million seats, which includes 3 million seats in the private Mitel cloud.

Mitel should be able to use ShoreTel's multi-tenant public cloud to make it easy and affordable for existing companies to switch to the cloud. Microsoft and Cisco can offer their customers private clouds that are hosted by service providers, but those typically come at a higher cost.

"They have got a pretty compelling story to tell in that they are the only provider that can scale up to the large enterprise that can support cloud or on-prem on the same platform," said Irwin Lazar, analyst at Nemertes Research, based in Mokena, Ill. "That's their core differentiator right now."

Mitel the latest infrastructure vendor to go private

Vendors, including Alcatel-Lucent Enterprise, Unify and Polycom, have also gone private in recent years, for similar reasons to Mitel. Avaya went private in 2007, only to begin selling stock publicly again earlier this year following its bankruptcy.

Because of their size and broad portfolios, Microsoft and Cisco may be the only vendors in the UC market that are immune to the market forces that forced the hands of Mitel and others.

"If you're living off the traditional infrastructure sales model, acquisition or going private is likely to come your way," said Zeus Kerravala, the founder and principal analyst at ZK Research in Westminster, Mass.

Mitel will likely seek to go public again at some point in the future, Kerravala said. Over the next few years, it can use the cover of being private to invest more in research and development and restructure its sales staff, without worrying about paying dividends or demonstrating profitability every single quarter.

"I'm expecting Mitel to use this time to really transform their business," Kerravala said.

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