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Elliott Management Seeks Increased Valuation for Polycom

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Past strategy ineffective

As stated in Part One, activist hedge fund Elliott Management disclosed a $100 million stake in Polycom (PLCM) and Mitel (MITL). The hedge fund is of the view that Polycom’s strategy in the past that included cutting costs, changing management, and repurchasing shares has not been effective to create shareholder value.

Elliott management suggested, “A combination of mid-tier Unified Communications and Collaboration vendors will create greater scale, significant synergies, and a meaningful valuation uplift for stockholders.”

Elliott further stated that it “would be willing to provide financing for Polycom’s acquisition of targets in the space, something we have successfully done before.” Polycom has struggled to increase revenues YoY (year-over-year) consistently in the last two years.

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Challenges for Polycom

Elliott Management has stated that Polycom, Mitel, and other UCC (Unified Communications and Collaboration) vendors such as ShoreTel (SHOR) are finding it increasingly difficult to maintain market share. Elliott believes that a “combination of mid-tier UCC vendors will create greater scale, significant synergies and a meaningful valuation uplift for stockholders.”

Polycom also faces intense competition in the video conferencing segment from vendors such as Cisco Systems (CSCO). Avaya, Huawei, and Polycom’s combined market share fell from 30% in 2010 to 23% in fiscal 2014.

Elliott management also states that Cisco has a strong collaboration portfolio with the ability to drive large, bundled sales through strategic customer relationships, providing it with opportunities to win sole-source deals with businesses and thereby to displace competitive vendors. We can further see this in the below statements:

  • “In the past, Polycom was our exclusive vendor for hardware equipment. The quality is precise and sound and visuals are perfect. Unfortunately, we are phasing Polycom out because our agency reached an agreement with Cisco,” said an AV (audio visual) technician at a major government agency.
  • “We use Polycom and LifeSize in addition to Cisco, but the IT group within the hierarchy of the agency is moving closer to establishing Cisco as our sole vendor in order to have uniformity across different locations,” said a video conferencing manager at a major government agency.

Polycom constitutes 2.8% of the iShares North American Tech-Multimedia Networking ETF (IGN) and 0.10% of the iShares Russell 2000 ETF (IWM). Peer companies such as Cisco and F5 Networks comprise (FFIV) 9.0% and 4.3% of IGN, respectively.

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