The M5 Case


The M5 Case

By Peter Radizeski, RAD-INFO Inc.  |  April 30, 2012

This article originally appeared in the April 2012 issue of Cloud Computing Magazine.

Recently, M5 Communications was acquired for about $160 million by ShoreTel. The premise PBX vendor caves into the pressure of the cloud communications space both because of the opportunity and the threat. Avaya, Interactive Intelligence (News - Alert) and MITEL have CaaS offerings. At some point, ShoreTel had to jump on that bandwagon.

It’s not enough to just offer hardware anymore. Customers deserve the choice. Many VAR’s already have both guns in their arsenal. To not do so would be to miss out on opportunities; this in today’s economic environment is not a healthy business avenue. ShoreTel’s (News - Alert) C-suite probably saw that they lacked a CaaS strategy, but the decision comes down to build or buy. The advantage to buying is that – if done properly – you get revenue, a market proven service offering, and a sales channel. Building from scratch has a big learning curve, capital investment and little revenue.

Why M5 Communications? M5 had a proven business model. At $48 million in revenue, M5 was one of the giants in the Hosted PBX (News - Alert) space with a proven sales record that had grown 30 percent in the last year. Their indirect and direct sales teams were effectively selling the service. Not many VoIP providers are organically growing revenue. In 2010, M5 was doing about $32M in revenue when it acquired Gekkotech, a Chicago based VoIP provider that was utilizing M5’s softswitch platform and bringing in about $8 million.

M5 had migrated off the Broadsoft platform in 2010. This move increased the profit margin by eliminating the licensing fees to Broadsoft. This was another factor that made M5 attractive – margin. For the second quarter of fiscal year 2012, ShoreTel revenue was $58 million with a net loss of $1 million. Hardware alone is a difficult business to be in, ask Amazon or Dell (News - Alert).

Under the terms of the deal, M5 shareholders will receive approximately $84 million in cash and 9.5 million shares of ShoreTel stock, for a total of about $146 million on stock value at close of sale. Moreover, M5 shareholders have incentives that could realize up to $13.7 million, according to the company’s press release.

M5 will be run as a separate division with CEO Dan Hoffman (News - Alert) still running things. This is a smart strategy; the same one that TelePacific took when it acquired Telekenex. The culture of CaaS is different than hardware / premise PBX. There is some rivalry there. Why break either corporate culture?

This transaction is just another example of how the legacy telecom world will have to jump into the new cloud world – mostly through buying since it will be cheaper and faster that building it from scratch.

Edited by Stefania Viscusi