ShoreTel acquires M5 Networks for $160M as it looks to develop cloud business

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ShoreTel (Nasdaq: SHOR) has agreed to acquire M5 Networks in a deal valued as much as $160 million, giving it a major entrée to the booming cloud services business in the form of a strong hosted VoIP and UC operation.

M5 shareholders will receive approximately $84 million in cash and 9.5 million shares of ShoreTel stock, which equates to a total of $146.3 million in initial consideration based on a ShoreTel's average stock price over the prior 30 trading days. In addition, M5 shareholders may receive additional contingent consideration of up to $13.7 million. The contingent payments are payable over the two years after closing and are based upon the achievement of certain revenue performance milestones for the year ended Dec. 31, 2012. The deal is expected to close by the end of March.

Privately held M5, which was recently given a visionary position in Gartner's Magic Quadrant for UC as a service in North America, caters primarily to businesses of between 50 and 500 seats. It has more than 2,000 customers and more than 60,000 recurring revenue seats in the U.S.

M5 itself made a pair of major acquisitions recently, in April buying contact center software vendor Callfinity, and in November 2010 buying hosted VoIP provider Geckotech.

With forecasts pointing to continued growth in the hosted UC market, Gartner estimates the market to be $700 million today and expects it to grow at a 36 percent compounded annual growth rate to $2.2 billion in 2015; the deal could be very good to ShoreTel.

ShoreTel CEO Peter Blackmore, during the company's earnings call (see ShoreTel tops analysts estimates in 2Q, ups revenue 22%), said M5 brings a proven hosted UC solution to the company. And, he said, ShoreTel, after eight months of performing an extensive buy-versus-bill review "determined that the secret sauce in hosted UC is not just a well developed R&D solution, but more fundamentally experienced in running a very different business model."

Blackmore said M5 also was attractive because it brought with it a low churn rate, high average revenue per unit, competitive customer acquisition cost and expertise in running in 24/7 data centers.

"The management skills required to run a hosted business are in many ways different from those necessary for the on-premise business," he said. "For us to build this expertise would have taken time and investment and would certainly have involved distraction and therefore risk to our current business. We therefore determined the best way to enter this market quickly and establish a strong position is to find a company with a proven business model, a significant recurring revenue stream, a good management team and then bringing that organization into ShoreTel as a new business unit."

Blackmore also said ShoreTel plans no changes in its current distribution model.

On the nuts and bolts side:

  • ShoreTel is acquiring M5's entire operation including its customer base, distribution capability and proprietary network, and will be extending offers to substantially all of its 200 employees;
  • Following the close of the acquisition, M5 will be operated as a ShoreTel business unit;
  • M5 CEO Dan Hoffman will become president and general manager of the new business unit;
  • M5 engineering teams will remain separate, but they will cooperate and coordinate in order to leverage the innovation and best practices of both groups; and,
  • The current ShoreTel Champion Partner reseller program will evolve to include the ability to offer hosted services once the reseller has been qualified and certified.

For more:
- see this release
- see the earnings call transcript from SeekingAlpha

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