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Elliott Discloses Active Stakes in Polycom and Mitel


Today, Elliott Management Corporation (“Elliott”) disclosed active stakes and accompanying 13-D filings in Polycom, Inc. (“Polycom”) (PLCM) and Mitel Networks (“Mitel”) (MITL) and sent the following letter to the Board of Directors of Polycom:

October 8, 2015

The Board of Directors
Polycom, Inc.
6001 America Center Drive
San Jose, CA 95002
Attn: Peter Leav, Chief Executive Officer and Director

Dear Members of the Board of Directors:

I am writing to you again on behalf of Elliott Associates, L.P. and Elliott International, L.P. (together, “Elliott” or “we”), which collectively own 6.6% of the outstanding common stock and equivalents of Polycom, Inc. (the “Company” or “Polycom”), making us one of your largest stockholders. In addition, we are today disclosing an active filing in Mitel Networks Corporation (“Mitel”), in which we are one of the largest stockholders and with whom we have a collaborative and productive dialogue. Our equity investments in both Polycom and Mitel are approximately the same size at around $100 million each. In addition, we also own stock in ShoreTel (“ShoreTel”). The investments are related.

The purpose of today’s letter is to outline our thoughts in the following sections:

1. Subscale Unified Communications and Collaboration (“UCC”) Vendors Face Meaningful Challenges: Polycom, Mitel and other UCC vendors have been challenged to maintain market share and will continue to face a very difficult market. Such conditions have led Polycom’s stock to meaningfully underperform all relevant metrics over all relevant timeframes.

2. Polycom Should Undertake a Full Strategic Review: Maintaining the status quo strategy will perpetuate Polycom’s track record of underperformance and risk further shareholder value erosion. In the last two years, Polycom has already responded by cutting costs, buying back stock and changing management; none of which has generated value to stockholders. Polycom must initiate a comprehensive review of all strategic options, and the time for that review is now.

3. An Industry Consolidation Strategy Should Be Evaluated and is Likely the Best Path Forward: Elliott strongly believes a combination of mid-tier UCC vendors will create greater scale, significant synergies and a meaningful valuation uplift for stockholders. Elliott would be willing to provide financing for Polycom’s acquisition of targets in the space, something we have successfully done before.

The letter details these items in the sections below. The majority of the letter is spent on Item 3, the “Consolidation Strategy,” which we believe to be the most attractive path forward for Polycom, with over 80% upside to the stock. We believe that Polycom is an excellent platform vehicle to roll up the UCC space: With significant cash flow, net cash and a capable management team and Board, Polycom can become an accretive M&A machine. Further, we believe the space is ripe for consolidation – small competitors with low valuations and duplicative cost structures create the opportunity.

Additionally, we have conveyed all of these thoughts to Mitel as well. We have owned Mitel for years, but acquired almost all of our new position this year based on the same thesis – that we believe Mitel is a good platform vehicle to roll up the sector and is also an attractive merger candidate for Polycom. Mitel has a very capable management team led by CEO Rich McBee and CFO Steve Spooner, has engaged in successful M&A and offers valuable tax benefits to a new combined company. We believe that the ideal Consolidation Strategy begins with a Polycom/Mitel combination, whether those companies stay public or go private.

We thank Peter and the Board for their consideration of our thoughts and look forward to our upcoming meeting.

About Elliott

Elliott is an investment firm founded in 1977 that today manages more than $27 billion of capital for both institutional and individual investors. We are a multi-strategy firm active in debt, equities, commodities, currencies and various other asset classes across a range of industries. Investing in the technology sector is one of our most active efforts at Elliott and one in which we have built a long track record.

Within the technology sector, we have made approximately three dozen active investments and have successfully identified value-creating opportunities at companies such as Citrix, BMC, Informatica, Brocade, Riverbed, Juniper, Novell/Attachmate, Blue Coat and many others.

One key differentiating factor in Elliott’s active investments, especially in the technology sector, is our deep focus on operations. Our team includes experienced and proven C-level executives with technical and operational capabilities from software and technology companies. These executives evaluate operations, products and markets within our investments and work to develop strategies to streamline operations, grow revenue and create value. We also have long-lasting engagements with leading operations consulting firms, sales and marketing specialists, and technical consulting firms that we deploy on our investments. Finally, in addition to our public portfolio, we have significant investments in private technology companies, which provide important insights into operating best practices, market trends and general industry knowledge.

Elliott’s Approach to the UCC Sector

We have followed this industry for nearly a decade. We have previously been stockholders in Polycom and are also long-time, passive investors in Mitel (including when it was a private company). As mentioned, today Elliott filed a 13D in Mitel representing a shift in our position to take a more active role in discussions with Mitel’s management team on a range of strategic options to create value, including the Consolidation Strategy. Mitel, based in Canada, is a diversified provider of unified communications and generates approximately $1.2 billion of revenue in premise-based, hosted and mobile communications. We have deep respect for Mitel’s ability to operate in a challenging industry and for its perspective on consolidation in UCC.

In addition to our long-term experience following the space, we have conducted extensive analysis on Polycom and its markets. We have retained experts, several top-tier consulting firms, specialty industry consultants, industry executives and investment bankers and have also surveyed hundreds of Polycom's customers. We have spoken with executives across the industry and developed an understanding of key purchasing criteria, go-to-market strategies, competitive dynamics and industry challenges.

The conclusion from all of our work is that Polycom faces a challenging future as a standalone company; we detail these findings below. What is unique in Polycom’s case is that the Company has already responded with the typical value levers that underperforming companies employ – returning significant capital to stockholders through large buybacks, cutting costs to deliver meaningful margin improvement and replacing management. Unfortunately, these steps have failed to deliver returns to stockholders. The Company’s stock price is trading near 52-week lows and has significantly underperformed all relevant benchmarks over long-term time periods, including the period following the Company’s management change and strategic pivot in 2013:

Ending September 25, 2015
Polycom's TSR Relative to: 1 Year 2 Years 3 Years 4 Years 5 Years 10 Years
1. S&P 500 (18%) (25%) (43%) (131%) (114%) (70%)
2. NASDAQ Composite (24%) (34%) (57%) (145%) (137%) (122%)
3. S&P 500 IT Index (22%) (38%) (42%) (129%) (122%) (107%)
4. Proxy Peer Group (23%) (26%) (32%) (117%) (79%) (188%)
Note: September 25th is the day prior to Elliott crossing 5% ownership and beginning significant stock purchases

Beyond stock price performance, Polycom has one of the lowest valuations in the broad enterprise technology universe – just 5x NTM EBITDA, reflecting a deeply cautious view of Polycom’s present and future prospects.

In our view, the need for immediate action is clear.

Section 1: Subscale UCC Vendors Face Meaningful Challenges

At its 2012 Analyst Day, Polycom conveyed its belief that revenue growth would be more than 15% per year. Instead, Polycom’s revenue has declined in each year since this guidance was introduced to stockholders. While Company performance has been poor, we think Polycom’s CEO Peter Leav and his executive team are quite capable, and this decline demonstrates just how challenging Polycom’s end-markets are and how necessary it is for the Company to take bold action.

Market Share Challenges: The videoconferencing market is highly competitive, and Polycom faces intense competition from a variety of vendors, including Cisco, Avaya, LifeSize, ZTE, Huawei and cloud-based vendors (e.g., Blue Jeans, Vidyo and Acano). Since 2010, Polycom’s market share has steadily declined. (Follow this link for a graphic illustration of Polycom’s market share decline:

Pricing Challenges: The combination of heads-up competition against traditional vendors and fierce pricing pressure from software-based and hosted infrastructure has led to meaningful pricing declines in key product categories. For example, Infonetics expects a greater than 50% pricing decline in the multi-purpose room category between 2011 and 2019. (Follow this link for a graphic illustration of this pricing decline:

Competition with Cisco: Cisco is a formidable competitor with a strong collaboration portfolio and the ability to drive large, bundled sales through strategic customer relationships. These relationships provide...