Why Did ShoreTel Buy M5?

Recently, M5 Communications was acquired for about $160 million by ShoreTel. The premise PBX (Private -Automatic- Branch Exchange) vendor had a bad quarter and caved to the pressure of Hosted PBX (Private -Automatic- Branch Exchange). Avaya, Interactive Intelligence and MITEL have hosted offerings. At some point, ShoreTel had to jump on that bandwagon - due to the big possibility and the threat that cloud comm places on premise only sellers.

The hole in their strategy

ShoreTel's C-level exes probably saw that the hole in their strategy by not having a CaaS strategy. Afterwards that, 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.

By scooping up M5, ShoreTel gets a proven business model. At $48 million in revenue, M5 was one of the giants in the Hosted PBX space with a proven sales record that had grown 30% in the last year. Their indirect and direct sales teams were effectively selling the service. Not many VoIP (Voice over Internet Protocol) providers are organically growing revenue. In 2010, M5 was doing about $32M in revenue when it acquired Gekkotech, a Chicago based VoIP (Voice over Internet Protocol) provider that was utilizing M5's softswitch platform and bringing in about $8M.

The Broadsoft platform in 2010

M5 left the Broadsoft platform in 2010. This move increased the profit margin by eliminating the licensing fees to Broadsoft. This might have been another factor that made M5 attractive - margin. For the second quarter of fiscal year 2012, ShoreTel revenue was $58.0 million with a net loss of $1 million. Hardware alone is a difficult business to be in, ask Amazon or Dell.

M5 will be run as a separate division with CEO Dan Hoffman however managing 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?

The rest of the cloud comm space get this deal?

Why can't the rest of the cloud comm space get this deal? One reason is that investors don't look at companies with less than $10M in revenue. You don't have a proven model at $4-5M. It's a different deal at that size. At over $20M, investors know that you can sell and you can scale. It's proven. Another reason was the average revenue per customer at nearly $2000. As Q-Advisors told the crowd at Cloud Comm Expo in Austin in 2011, that number has to be north of a thousand to be attractive. Those are pretty good reasons for the 3x revenue number.

Recently, M5 Communications was acquired for about $160 million by ShoreTel. The premise PBX vendor had a bad quarter and caved to the pressure of Hosted PBX. Avaya, Interactive Intelligence and MITEL have hosted offerings. At some point, ShoreTel had to jump on that bandwagon - due to the big possibility and the threat that cloud comm places on premise only sellers.

By scooping up M5, ShoreTel gets a proven business model. At $48 million in revenue, M5 was one of the giants in the Hosted PBX space with a proven sales record that had grown 30% 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 $8M.

The Broadsoft platform in 2010

M5 left the Broadsoft platform in 2010. This move increased the profit margin by eliminating the licensing fees to Broadsoft. This might have been another factor that made M5 attractive - margin. For the second quarter of fiscal year 2012, ShoreTel revenue was $58.0 million with a net loss of $1 million. Hardware alone is a difficult business to be in, ask Amazon or Dell.

Why can't the rest of the cloud comm space get this deal? One reason is that investors don't look at companies with less than $10M in revenue. You don't have a proven model at $4-5M. It's a different deal at that size. At over $20M, investors know that you can sell and you can scale. It's proven. Another reason was the average revenue per customer at nearly $2000. As Q-Advisors told the crowd at Cloud Comm Expo in Austin in 2011, that number has to be north of a thousand to be attractive. Those are pretty good reasons for the 3x revenue number.

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