Mitel's IPO and the Future of Communications this Decade

2009 was a momentous year for Nortel (News - Alert) -- finally imploding under a combination of extreme debt, acquisition challenges, Asian competition and the remnants of a financial scandal from years past. Recently I analyzed the acquisition of Nortel's enterprise unit by Avaya. And last month at ITEXPO (News - Alert) in Miami we heard the details of the merger and roadmap. While there was vibrant discussion at the conference regarding Avaya's roadmap, it should be noted that Mitel (News - Alert) too has been a major topic of discussion as it plans an IPO this year.

You may recall the IPO plans of Mitel were shelved in 2006. Many thought this was as a result of a poor showing in the public markets by Vonage (News - Alert), but company execs explained the reason for the pull back had more to do with the fact they were able to bid for and acquire Inter-Tel and didn't need the public markets to consummate the transaction.

The contrast between the fortunes of Mitel and Nortel won't be lost on many industry veterans. Both telecom companies excelled due to technology leadership, but both had an understated approach to customer and market communication, meaning PR and marketing. This is not uncommon -- the world is awash in tech companies that use an engineering approach to marketing.

Mitel plans on using the money generated from an IPO, which is hoped to raise as much as $230 million, to repay its revolving credit line, loans and to make acquisitions. Interestingly, Mitel has recorded net losses every year from 2001 until 2007 and was profitable in 2008. In 2009, by all accounts a very tough year, the company increased sales by 6.2 percent.

It is worth noting that the company's fiscal year ends April 30th and even though sales were up, earnings declined resulting in a net loss of $193.5 million as opposed to net income of $12.6 million in the prior fiscal year. This loss was due to a goodwill charge of $284.5 associated with purchasing Inter-Tel (News - Alert). This sort of charge is generally seen when assets that have decreased in value are realized.

Billionaire, serial entrepreneur, tech visionary and 4GWE/ITEXPO keynoter Sir Terry Matthews (News - Alert) is a Mitel cofounder and currently has a 35 percent equity stake in the company. He’s in an interesting position to use the cash from this transaction to acquire one of the incubator companies he is running in Mitel's headquarters.

Meanwhile, Francisco Partners owns 44 percent of the company.

Mitel is not the only tech company in which they have an interest. Others include Aconex, AMI Semiconductor, Attachmate, Barracuda Networks, Blue Coat, FrontRange Solutions (News - Alert), Metaswitch Networks, WatchGuard, WebTrends and XcelleNet.

One would imagine with such a portfolio of companies under its belt, Francisco could have made a case to use Mitel’s formidable sales and reseller channels to sell solutions from Barracuda Networks (News - Alert) and FrontRange Solutions, the company behind Goldmine CRM software. In addition, Barracuda has a wholly owned subsidiary, CrudaTel, which leverages open source and by integrating it into the Mitel product line, the company instantly gets a Linux-based solution. There are some synergies with Metaswich, but in my experience, having a common investor does absolutely nothing to promote synergies between organizations.

Ironically, one big exception is Wesley Clover (News - Alert), the holding company for the dozens of companies in which Terry Matthews has an interest. What Terry has done with these companies is to move top management around and strategically place directors so as to foster more cooperation between the companies he owns part or all of. Other investors may want to emulate the Japanese keiretsu approach, as it has definitely allowed many of the Wesley Clover companies to have an easier time selling communications and technology solutions.

With one less large competitor in the market, it remains to be seen if Mitel can use this opportunity to raise cash, raise its profile and increase market share.

The company was the first in the communications space to promote its virtualization solutions and in fact led TMC (News - Alert) to launch the Virtualization Summit at ITEXPO last month. It is innovation like this that has helped keep the company on the short list of many enterprise communications buyers. Increased resources should just make it easier to stay ahead of the communications pack.

Still, challenges loom and questions remain. Who will win the war for virtualized communications? Will Mitel's early strength in the space yield to larger competitors like Avaya, Cisco (News - Alert) and ShoreTel? Moreover, to what extent was the Nortel implosion a factor in Mitel's increasing sales? Shoretel has been coming on strong, how will this challenge Mitel going forward? Then there is the open-source space and its ability to make corporate customers believe communications solutions should be cheaper - how much margin erosion will be blamed on Asterisk (News - Alert) and similar solutions?

The upsides in the enterprise communications space include video, collaboration, cloud computing, SIP trunking, mobility, wireless, unified communications, HD voice and a plethora of interconnection opportunities between these spaces such as FMC. How Mitel and the industry at large navigate these opportunities and unforeseen pitfalls in the next year may set the tone for communications industry fortunes for the rest of the decade. IT

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