ShoreTel's acquisition of M5 Networks (News - Alert) looks more than a little crazy at first glance. But it may be a "crazy like a fox" move, since it now moves the company out of simply making IP phone systems and into a fast-growing market of hosted services. However, it is not without risk and certainly not without significant cost.
At the end of December 2011, ShoreTel (News 
- Alert) had a bit less than $116 million in cash, equivalents and short-term investments. In buying M5 Networks, it is spending around $84 million in cash out of that horde -- 72 percent of its larder to buy companies and respond to changing market conditions. There's still $32 million left, and that's nothing to sneeze at, but the company is also carrying a GAAP net loss of $2.5 million on the second quarter of its 2012 fiscal year and a non-GAAP net loss of $1 million dollars.
M5 shareholders will get 9.5 million ShoreTel shares. Prior to the deal, the company had 47.68 million shares, according to Google (News - Alert) Finance, with shares trading in a range of around $6.30 to $7.23 a share over the last thirty days. After the deal was announced, the stock price dropped around 16 percent and traded at around $5.40 at the close of business on February 3.
One industry insider I talked to at ITEXPO (News - Alert) East last week said ShoreTel effectively paid over 40 percent of the company's worth to acquire M5, based upon a ShoreTel pre-deal market cap around $344 million as compared to the $143 million stock and cash bundle paid for M5 networks.
But that's not all. ShoreTel also faces its own cultural and technology challenges in integrating M5 and the cloud UC services into its sales and marketing. A number of sources said ShoreTel was basically oblivious to hosting and cloud services up until less than a year ago, with some not even "getting it" when it came to discussing the merits of cloud services when combine with ShoreTel hardware.
Now ShoreTel needs to continue to sell its hardware solution while integrating cloud services into its sales pitch. There's also the matter that M5 has built and run its solution around Cisco (News - Alert) hardware, so how ShoreTel phones and hardware side into M5's hosted operation is an open question. It appears ShoreTel will initially keep its hardware channels separate from M5's sales channels to avoid conflicts; there's little overlap between the channels and customers.
Doug Mohney is a contributing editor for TMCnet and a 20-year veteran of the ICT space. To read more of his articles, please visit columnist page.Edited by
Rich Steeves
