Consolidation Continues

I sat down to write a fairly simple wrap-up of the Mitel acquisition of Inter-Tel, and what it meant for the market. I figured that the two vendors were about to enter the realm of integration, ironing out their future product plans and focusing their vision for the future. I mean, at this point of the game, nothing ever happens to derail a merger, right?

Alas, nothing is ever over until the proverbial “fat lady” hits the last high notes of her aria. Certainly not when Steven Mihaylo feels that he can provide a better deal for Inter-Tel’s shareholders, of which he, as former CEO, is still a major one. In fact, Mihaylo is reportedly the largest individual shareholder with approximately 19% of the company’s total shares. He is the “beneficial owner” of 5,189,748 shares as of this writing.

Let’s recap.

On April 26, 2007, Mitel Networks Corporation and Inter-Tel announced they had entered into a merger agreement whereby Ottawa, Canada-based Mitel would acquire Tempe, AZ-based Inter-Tel for $25.60 per Inter-Tel share in cash, representing a total purchase price of approximately $723 million (all amounts in US dollars).

Once completed, the merger would create a combined company with “anticipated revenues of over $800 million.”

At the time, industry watchers generally had a positive view of the merger, which played out as yet further evidence of industry consolidation.

The day after the news of the acquisition broke, analyst/blogger Jon Arnold wrote the following: “. . . [it] will build two mid-tier players into a big, single mid-tier player who can dominate their space as well as better challenge the top tier vendors. Sounds like a good move for both companies, and it will be interesting to see how they combine their portfolios and manage joint customers.”

Soon after, on May 15, Inter-Tel received a letter from Vector Capital Corporation, in which the latter expressed an interest in acquiring Inter-Tel for an all-cash price of $26.50 per share, a premium of about $23 million over the Mitel-led bid at that date.

Now, Inter-Tel is a public company and as such its primary responsibility is to maximize value to its shareholders. So in response to the Vector Capital proposal, Inter-Tel said its special committee had determined that Vector Capital’s bid was reasonably likely to lead to a superior proposal, and so they notified Mitel of the committee’s decision to engage in talks with Vector Capital.

Fast forward several weeks and on June 4, 2007, Steven Mihaylo sent a letter to Inter-Tel shareholders asking them to vote down the proposed Mitel offer and explaining that Inter-Tel should undertake a leveraged recapitalization, yielding “significantly greater present value than the current offer”.

“Based upon discussions with my financial advisors,” he wrote, “I am confident that the recapitalization I envision can be financed using some of the Company’s existing excess cash and approximately $200 million of additional borrowing at reasonable cost. . . I formally asked the Board of Directors to consider this alternative in lieu of the Mitel buyout offer to be voted on by shareholders later this month. I am hopeful that they will thoroughly evaluate my value-maximization proposal.”

Mihaylo concludes his letter by reiterating the point that he is not against the sale of the company for a fair price, to Mitel or anyone else: “If Mitel or another bidder offers what I believe is a fair price I will gladly support it; however, in the absence of that offer, I believe the Company has a better alternative through a leveraged recapitalization”.

In the wake of the Mihaylo letter, Vector Capital Corporation has decided not to pursue an offer to acquire Inter-Tel.

Deadlines being deadlines, there was to be no resolution of this matter as my article went to press. A spokesman for Inter-Tel confirmed that an Inter-Tel shareholder vote was set to take place on June 29, 2007.

Avaya Goes Private

Not to be outdone by two rivals in the IP communications space, Avaya agreed to a private equity buyout. The Basking Ridge, NJ-based company on June 4 announced that it had entered into a definitive merger agreement with Silver Lake, an investment firm focused on large-scale investments in technology-driven growth industries, and TPG Capital, a private investment partnership, for approximately $8.2 billion, or $17.50 per common share.

According David Molony, principal analyst at Ovum, “The deal for Avaya in one sense is a vote of confidence in the company and the IP telephony business. That is because private equity typically is looking for businesses with reliable cash flows it thinks can be improved quickly and substantially.”

While the offer to purchase Avaya is unlikely to attract any counter-offers, the investors have inserted a break-up fee of up to $250 million if Avaya decides to back out of the arrangement. And according to customary documents filed with the Securities and Exchange Commission, the Merger Agreement contains a 50-day “go-shop” provision, which essentially means that Avaya retains the right to solicit and entertain competing proposals through July 24, 2007. If Avaya receives and accepts a better offer before that date, they would have to pay an $80 million break-up fee. If they decide to back out after that 50-day period, the fee would skyrocket to $250 million.

But that never happens, right? IT

Greg Galitzine is Group Editorial Director for TMC’s IP Communications Media Group.

Internet Telephony Magazine Table of Contents