Mitel Networks has reached an agreement to acquire software and communications networks’ provider Polycom (NASDAQ:PLCM) for $1.96 billion.
The deal’s announcement caused Mitel Networks (NASDAQ:MITL) shares to fall around 10.8% early Friday, while Polycom increased 8.8 percent before trading started, but was down by 2 percent by the end of the day and fell an additional 1 percent on Monday. The agreement is expected to be finalized sometime in the third quarter but is still a subject to both shareholder and regulatory approval.
The terms of the agreement are that Polycom shareholders will receive $3.12 in cash and 1.31 Mitel shares for each common stock they own, which effectively values each Polycom share at $13.68. After the takeover, Mitel shareholders will hold about 40 percent of the newly combined company, while Polycom stakeholders will have around 60 percent. The new company will be headquartered in Ottawa, Canada and operate under the Mitel Networks name, however it will retain Polycom’s strong global brand. Elliott Management advised the two companies on combining their operations even though it has an equity stake in both companies.
Mitel Networks (NASDAQ:MITL) is expecting that the merger will help it gain ground in the rising enterprise communications market as it will increase its scale and portfolio of products. Not only that, but the acquisition will reduce the company’s net debt leverage ratio significantly. Looking ahead the deal is also expected to generate operating synergies of $160 million by 2018 and eventually boost annual revenue to around $2.5 billion.
After reaching the agreement to be acquired by Mitel Networks (NASDAQ:MITL), Polycom also announced its director Betsy Atkins had resigned from the board. Meanwhile, shareholder rights attorneys at Robbins Arroyo have also announced that they are investigating the proposed acquisition of Polycom. The reason for this is that the merger consideration is significantly below most recent analyst valuations. The main focus of the impeding investigation is on whether or not Polycom’s board of directors is undertaking the required due process in order to obtain maximum value so that the deal will adequately compensate its shareholders.
With the impending deal facing this kind of scrutiny, the decision to sell the company now instead of allowing the shareholders to benefit from the company’s current success, may mean it will not go through. Another key consideration, particularly for potential investors in the newly merged firm, is whether the deal will actually deliver on the predicted increases in scale that both firms desperately need, to gain a stronger grip on the market.
With the constant rapid changes in the technological landscape and fierce competition in this field, there is a strong possibility that the deal will not add shareholder value on either side and could put downward rather than upward pressure on the share price. However, Mitel’s other recent acquisitions have boosted its revenue significantly meaning that at least for the short term, this may be a good investment opportunity.