Mitel Networks Corp. made its US$147.37-million initial public offering on April 22, a day when at least five other companies made their debut on the markets.
It was the largest IPO ever in Ottawa, enabling the company to reduce its debt to about $359 million, or three times its EBITDA level, down from five times.
However, the raised amount was lower than Mitel’s goal of $230 million due in part to crowded markets, and Mitel’s share price has fallen steadily since then. So how does the company view the IPO’s outcome? OBJ spoke with CEO Don Smith and chief financial officer Steve Spooner to find out.
OBJ: What were your reasons for doing an IPO?
SMITH: Let me give you an example of the challenges we face. In April, Barclays published a CIO survey that indicated the most important area of spend for CIOs in 2010 was going to be something called server virtualization and that the most important network priority was IP telephony. If you looked at us you’d think we’d be very well-placed with our IP telephony solution that plays in a virtualized world.
However, we’re not mentioned in the report because only publicly traded companies were referenced. As such, the first piece of the IPO is what I call a branding and awareness thing.
The second one is deleveraging our debt, and enabling us to more easily deal with the environment of uncertainty ... about our position.
The third one is that once you’re public you have an M&A currency. Not to say that there’s anything on the horizon we want to do but … should another opportunity arise, then being in a position to actually consider it is valuable to us as well.
SPOONER: One of the things we have noticed over time, the expression we use is “When we get to the dance, we do very well,” meaning if we had the opportunity to be in front of prospective customers ... our win ratio was actually quite good.
The biggest challenge for Mitel has been that our brand isn’t as well-known, certainly in the U.S. ... that we don’t get invited to the dance enough. So with being a public company now, having analysts writing about us, those things are important parts of getting visibility ... and increasing the number of opportunities we can compete for.
OBJ: Was the amount of IPO during your debut the reason for a lower financial goal than previously announced?
SMITH: Value is determined by many things and many of them are external factors that are clearly outside our control. If you think back to that time, you had the week before the SEC with a lawsuit against Goldman, concerns that have continued even through to the start of May regarding Europe and the credit ratings of overall countries and what that’s done to the market in general. You saw something called the VIX Index, which is a measure of volatility, actually rising through that period. That volatility index impacts people’s views of IPOs.
At around that same time you saw other IPOs price below their range and you also saw others withdrawn. So I think it was an environment that had those kinds of dynamics.
OBJ: So was it the right time for your offering?
SMITH: Absolutely. You cannot judge how many people at any given time are going to be doing the same thing; nobody has visibility on any of that until it starts to happen. And certainly I don’t think anybody had a good enough crystal ball to expect the SEC would go after Goldman Sachs on the Thursday or Friday the week before.
OBJ: You’ve seen several quarters of losses recently. What does that mean for your investors?
SPOONER: If you look historically at Mitel’s financial statements, you need to look as to why Mitel was posting losses. We had the commitment of our investors and the vision to invest in Internet protocol technologies well in advance of what our peer companies were doing … and also we viewed that there was beginning to be a global market opportunity. Therefore, Mitel needed to build the sales and service capability around the world so that when the markets started to move towards IP, Mitel was ready. So we very much employed contrarian investment strategy.
As a private company, we had the luxury of doing that. As a result, roughly 95 per cent of what Mitel sells today is IP-based solutions, while only about 60 per cent of our competitors’ ship is IP communications. We’ve made the transition to become a software company ... and that heavy lifting was done while private.
Having said that, one of the things you’ll see in our prospectus is the notion of operating profitability … if you look at our EBITDA performance in Q1 of 2009, our gross margin expanded 270 basis points and our EBITDA margin expanded by 630 basis points, all of this when all companies were working through probably the worst recession that most of us have ever had to operate through.
OBJ: Your IPO has been widely anticipated for years; do you think the outcome was one that satisfied investors and observers?
SMITH: It’s the biggest IPO in Ottawa and also the biggest communications equipment IPO in the last 10 years in North America, so we believe it’s quite a significant coming-out.
SPOONER: None of our key shareholders sold as part of the IPO, so this was less of what I would call a traditional exit for original investors and more of a financing event, to frankly give Mitel additional capabilities to grow and execute our strategy.
Mitel did initiate an IPO process in 2006 and we chose not to pursue that because we saw the opp to purchase a competitor, Inter-Tel, that was larger than us. We felt that if we had … waited to have a publicly traded share price – an IPO process can take you six to nine months from start to finish with no guarantees that you’ll get it done as the markets can move on you – we felt we would miss the opportunity to acquire a company that we thought was a superb strategic fit to strengthen Mitel’s position in the mktplace.
We felt that the greater opportunity to create long-term shareholder value for Mitel was to … double our size, to increase our geographic presence, our capabilities in the largest market in the world, that being the U.S., to strengthen our product portfolio and to improve our brand. So doing that while a private company, to do all the work that’s involved in integrating two large organizations, we felt that the advice we got is that the important thing is to prove the operating model.