ShoreTel Makes Splash With M5; VARs Ponder The Ripple Effects

ShoreTel solution providers see ShoreTel's $146 million acquisition of hosted UC vendor M5 Networks as a long-time-coming move and one that, at the very least, puts a stake in the ground for ShoreTel's cloud strategy and gets partners excited about the possibilities.

"I'm glad they’re doing it via acquisition," said Don Gulling, president of Verteks Consulting, an Ocala, Fla.-based solution provider. "You've got customers and recurring revenue already. You've got a management and execution team of people who know how to run a hosted NOC and guys who know how to sell hosted voice. And besides, if ShoreTel were to have decided six months or a year ago that they really wanted to build something else to go after this, it would just take too long."

"Obviously, they didn't do well trying to build it themselves, so they purchased it," said Dave Casey, CEO of Westron Communications, a Carrollton, Texas, solution provider. "I understand running it as a separate entity: protecting the existing channels, keeping the customers satisfied. All that's cool."

"It's long overdue," said Randy Marcotte, co-founder and director of sales for Perfect Video Conferencing, a video/UC VAR and managed services solution provider. "ShoreTel missed the boat for about three years now in not creating their own cloud or giving partners deeper discounts on core infrastructure so we [could] do that for them. It was time."

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Under the terms of the deal, which ShoreTel unveiled Wednesday, M5 shareholders will receive about $84 million in cash and 9.5 million shares of ShoreTel stock, equating to about $146.3 million in initial consideration, with an additional $13.7 million payable over two years if certain revenue performance milestones are hit. It's a roll of the dice by ShoreTel no matter how it's looked at, not least for the fact that the initial $84 million for M5 represents nearly three-quarters of ShoreTel's reported $115.9 million second-quarter 2012 cash balance.

"It's pretty clear they're cleaning out the shelves to do this," said Casey.

"This is [ShoreTel CEO] Peter Blackmore's blockbuster. Maybe they make some very small acquisitions, but this is the big one," added Gulling.

For all intents and purposes, however, it was worth that roll of the dice. M5, a survivor of the first wave of hosted VoIP and application service provider companies in the early 2000s, has continued to grow, and last year posted what ShoreTel said was high $40 millions in revenue. M5 has about 2,000 customers and 75,000 end users.

"Their average revenue per subscriber is in the mid-60s," said Don Girskis, senior vice president of worldwide sales at ShoreTel, in an interview with CRN. "That's an industry-leading average, and that kind of ARPU [average revenue per user] relays a strong message. There are a lot of areas where we think we can complement each other."

M5 brings a number of other assets to the table. All of its products run in a hosted delivery model, from hosted call recording to conferencing to business intelligence and analytics. Key to its managed hosted UC solution is the M5 Call Conductor, which M5 developed in-house and used to replace its former Broadsoft service delivery platform in 2010.

Two of M5's recent acquisitions brought it more assets as well: It purchased contact center software specialist Callfinity in April 2011 and a fellow hosted VoIP provider and former competitor, Geckotech, in fall 2010.

That expansion made M5 the largest dedicated hosted VoIP player in the country, though the market is still quite fractious. Research firm Gartner puts M5's market share in the unified-communications-as-a-service market at about 7 percent -- single digit, yes, but that’s in a market where no one particular player has more than 10 percent.

And the market M5 plays in is one that customers care about, solution providers said.

"They're well-positioned. It's a mature product and I think they've got a good reputation from everything I've seen," Casey said. "And we are seeing an uptick in hosted, particularly in the UC space. There are a lot of customers deep into application integration and looking at the UC side of things and saying, ‘We already run this part of our company on, why would we not try to do the same with our phone system?’ "

NEXT: How The ShoreTel-M5 Deal Came Together

Girskis said ShoreTel began looking at potential acquisition targets in the hosted UC space about seven months ago. At ShoreTel's Champion Partner Conference in Chicago in July, Blackmore identified mobility and cloud as among the "pillars" that would drive ShoreTel's growth, though several partners at the show said ShoreTel's discussion of a hosted strategy was muted compared to previous years.

ShoreTel found its mobility play behind the technology it bought with Agito Networks in 2010, and the M5 pickup represents the missing cloud piece, according to Girskis.

"In April [2011] we did a refresh of our five-year plan and game up with the four pillars for growth you heard at the partner conference," Girskis said. "When the board approved our plan in June, we embarked on a path of make vs. buy. Did we want to build our own data centers, acquire the billing systems and provide our own platform, or did we want to go ahead and buy a company? We came to the conclusion that for speed to market, we needed to buy a company, so we began an extensive vetting process."

Girskis said ShoreTel was familiar with M5 CEO Dan Hoffman and several of his lieutenants -- three of M5's current salespeople were sales representatives under ShoreTel Vice President of Sales Tim Gaines.

"M5 is a really good fit for us," Girskis said. "They share our maniacal focus on customer satisfaction."

According to Hoffman, the ShoreTel and M5 teams first formally met at Dreamforce in San Francisco in September. Hoffman described ShoreTel's team as "strikingly open book from our first exchange."

"Combining what we each do, it is chocolate and peanut butter," Hoffman said in a post to the M5 company blog Wednesday. "ShoreTel has the best app on the market to insert your desk phone into your smartphone. Their UC and collaboration suite is polished, as are all their interfaces. And they make their own handsets, allowing them to control this all-important customer touch point. They have a formidable presence in the channel. M5 needs these things.

"ShoreTel doesn't know how to be a cloud service provider, but they do understand what their competitors have not figured out," Hoffman added. "Cloud isn't just partitioning software and running it in a data center. It needs to be in your DNA."

ShoreTel also will be deliberate in how it lets ShoreTel partners add the M5 hosted offering and vice versa, Girskis said. With a few exceptions -- notably CDW -- ShoreTel and M5 have very little overlap in existing partners. ShoreTel initially will onboard a select few ShoreTel partners over to M5, and M5 partners interested in selling ShoreTel will need to go through ShoreTel's standard training and partner certification programs to do so, like any other new partner.

"Now that we have a definitive agreement in place, we can look at rolling out a program for ShoreTel partners that we'll test with a few of them," Girskis said.

ShoreTel hosted a Webinar for partners Thursday afternoon to talk through many of the deal’s particulars. Several solution providers said ShoreTel executives told them they would look to open M5 services to ShoreTel partners starting in the April time frame, following the deal's completion.

It's important, solution providers said, for ShoreTel to keep the M5 assets restricted to certain partners so they don't disrupt the separate sales channels and customer bases.

"I applaud that because a lot of the rank-and-file ShoreTel partners probably aren't a good fit for it," Westron's Casey said.

NEXT: ShoreTel Partners See Opportunity, But Have Concerns

Rick Hirsh, CEO of Transcend United Technologies, a Springfield, Pa.-based solution provider and ShoreTel's largest non-carrier VAR partner, urged ShoreTel to be clear in how it wants partners to sell M5 and how it will integrate the assets.

"I want to hear more about it fits into their overall strategy," Hirsh said. "They've definitely made a big splash."

Acquisition integration can be distracting, said several partners, which could prove a problem for ShoreTel as it fights to take UC market share away from Cisco and Avaya and add to its standing as the No. 3 market player in the space.

"I do worry that they'll be distracted from their core story of simplicity," Perfect Video Conferencing's Marcotte said. "ShoreTel has a solid PBX that integrates outwards; you tap things on through software and add-on modules. Now there are more stakeholders internally that want to sell a specific thing, so I do worry about them limiting that ShoreTel simplicity."

Marcotte wasn't the only solution provider worried about a distraction from ShoreTel's "Brilliantly Simple" mantra.

"The issue is that it's not leveraging the ShoreTel architecture, which is a problem because, to a certain extent, many partners have already made moves to hosted partners and have those relationships already," said a top executive at a well-known ShoreTel partner, who declined to be named. "I understand the move, but I don't know enough yet that I'm ready to call this a positive for the channel. They've brought another architecture in. It's under the same brand, but it's still another architecture."

ShoreTel's Girskis said the company is committed to keeping M5 a separate business unit, and that a careful integration will allay those partner concerns. M5's Hoffman will continue to run the M5 piece and will report to Blackmore.

"I believe that keeping the hosted business as a separate business unit makes all the sense in the world," Girskis said. "There are obvious integration points where we can work together -- you can do things like look at government purchasing vehicles and work together but maintain separate business units."

Above all, partners and ShoreTel observers applauded ShoreTel's decisiveness -- especially with so much uncertainty about the cloud market and cloud's role in UC. Several sources pointed to Blackmore's assertion, made at the Chicago conference and repeated several times since then, that cloud was both an opportunity and a threat to ShoreTel's key businesses.

"To me, this signals he made a decision -- that it was more opportunity than threat," said longtime communications analyst Sheila McGee-Smith, president and principal of McGee Smith Analytics. "So they said, ‘Let's take some of the threat off the table by getting in the game.’ I love the choice of M5. It's suitably aggressive for ShoreTel, not overly aggressive, and it matches the mood of the market."

McGee-Smith said the M5 acquisition, combined with the mobility assets ShoreTel bought when it acquired Agito, gives ShoreTel a leg up in both the cloud and mobility trends dominating the UC discussion. M5's hosted services give ShoreTel an advantage against larger competitors like Avaya that don't have clearly defined hosted UC strategies.

"Let's be honest: Avaya has not found good way to play in hosted yet," McGee-Smith said. "From a strategic point of view, ShoreTel is in a better position to do something like this. They can make a nimble move and they did."

The M5 acquisition also positions ShoreTel well for different revenue streams and different partnering models, solution providers said. Several suggested that because M5 runs on its own service delivery platform and not a Broadsoft or other competitive platform, ShoreTel could look to offer services wholesale, in a white-label arrangement with managed services partners.

M5's integration with a number of different cloud-focused software vendors -- such as Salesforce and NetSuite -- also makes it attractive as a bundled play with applications and cloud platform infrastructure.

"People who want to buy a contact center that have already brought in cloud, who want the simplicity or scalability, that's something I could sell," Verteks' Gulling said. "That's an incentive to find a list of Salesforce people to talk to and get to discussing much higher-value sales. If it's just core dial tone and hosted, customers won't want to pay, but when you're talking application integration and things like distributed contact center and call quality assessment and recording, then we have a huge value."

NEXT: Lots Of Cloud Integration Opportunity

Partners will be watching the integration, from small maneuvers -- M5's current list of approved and supported IP phones is primarily Cisco models, for example -- to strategic changes in the program.

"If ShoreTel can keep the message about survivability and about how something stays redundant and doesn't go cheap over a basic Internet connection, they'll work here," said Perfect Video Conferencing's Marcotte. "People who know our business know that we need to maintain healthy margins, so we'll be looking to understand that here."

"I like that it's ShoreTel now having a complete solution to engage customers with," Westron's Casey said. "It's important to have both a cloud-based or hosted-based alternative to premise-based, and have that all be ShoreTel. But short term, [hosted] is a totally different sell. If you already have ShoreTel but want to add a cloud-based option, it's probably not the time to do that yet; you'll wait on their next series of phones."

ShoreTel's acquisition and integration of Agito built a lot of faith in ShoreTel's ability to do M&A well, Casey said, adding that the company articulated a clear value proposition around the Agito technology that became ShoreTel Mobility and used its smaller size to be nimble about how it got those products and services out to the channel. M5 is obviously a much bigger acquisition and will test ShoreTel further, he said.

"The mobility stuff is starting to click now, and some of the deals we're in there are going to start to become real revenue producers in 2012," Casey said. "I think the longer they keep the M5 business separate, it'll give them time to work out an integration story that's going to work for everyone."