Cisco and BroadSoft: A Game Changer for the UCaaS Landscape

This Industry Viewpoint was contributed by Michael Quinn, Gerry DeHaven and Andrew Gaffney of Q Advisors

On October 23, Cisco announced an agreement to acquire BroadSoft, the leading provider of cloud-based unified communications and collaboration solutions, for $1.9 billion in cash, or $55 per share.  The deal is expected to close in the first quarter of 2018.  The purchase price represents a 2% premium from the previous market closing price and a 28% premium to the market price prior to reports in late August that BroadSoft was pursuing strategic alternatives.  On an enterprise value to LTM revenue basis, the purchase price represented a multiple of 5.4x¹.  This purchase price multiple represents the clear high-water mark for the UCaaS sector, reflecting a variety of factors including the uniqueness of the BroadSoft portfolio of solutions, its dominant, market-leading position in UCaaS and the growing importance of cloud to the global unified communications and collaboration market.

In Q Advisors view, Cisco’s acquisition of BroadSoft is a logical fit for both parties and will dramatically shift the UCaaS landscape.  For Cisco, the integration of BroadSoft’s BroadWorks and BroadCloud solutions will lead to a major transformation of Cisco’s unified communications and collaboration (“UC&C”) business.  The BroadSoft portfolio makes ideal strategic sense in combination with Cisco’s UC&C business, filling a huge gap in Cisco’s cloud strategy.  In addition, the acquisition immediately moves Cisco into a clear market leadership position in the UCaaS space, with a reported 19 million endpoints worldwide, which is estimated to be roughly 45%² market share in cloud-installed base.

Another likely outcome of the Cisco-BroadSoft deal is further acceleration of the recent consolidation trend in the industry.  BroadSoft is by far the biggest acquisition target to be announced in the UCaaS sector, but it is likely to lead to one or more additional dominoes falling over the next six to twelve months, among a group that includes 8×8, Jive Communications, Ring Central and Vonage.

Key Takeaways

Complementary Fit for Both Parties

The acquisition is an excellent strategic fit on multiple levels, including deepening Cisco’s cloud capabilities and expanding its presence in the SMB and midmarket customer segments.  Cisco’s unified communications efforts have centered around its Spark product, which has seen slow market adoption.  Spark has a variety of challenges, including channel conflict and the difficulty of creating a true multi-tenant solution.  BroadSoft’s product suite gives Cisco a robust, multi-tenant UCaaS capability with worldwide presence, and fills an obvious hole in the Cisco UC&C solutions lineup.  It also complements Cisco’s current collaboration offering, and in the longer term, offers BroadSoft’s existing service provider customer base a roadmap to a more robust suite of messaging and collaboration solutions.  In addition, a combined Cisco-BroadSoft can differentiate itself with its ability to deliver an end-to-end cloud solution, including UCaaS and SD-WAN capabilities. This cloud solution set can be bundled with Cisco hardware (routers and handsets) and other products to create a “walled garden” which could significantly impact other software and hardware providers. There remains a cloud contact center gap in Cisco’s product strategy. Even with the Transera deal, BroadSoft is viewed as contact center light. We expect Cisco to be actively pursuing other cloud contact centers to fill the gap.

In addition, the acquisition is highly complementary from a customer perspective. Cisco and BroadSoft share deep relationships in the service provider market (telcos, cable operators, etc.) and can now offer a deeper portfolio of premise-based and cloud solutions.  BroadSoft, with its leadership position in the UCaaS space, has penetrated 25 out of the top 30 carriers.  More importantly for Cisco, BroadSoft’s historical strength is in the SMB market, and more recently in the midmarket.  Cisco, with its HCS solution, has been largely focused on medium to large enterprises, and can therefore now offer solutions that work well for the full spectrum of customers from SMB to multinational enterprises.  From a BroadSoft perspective, Cisco’s large channel and VAR distribution network will accelerate its ability to penetrate the midmarket enterprise target market.

A Transformative Event for the Broader UCaaS Market

While the potential fallout from a deal of this magnitude will take time to play out, there is little doubt that the UCaaS market will experience upheaval.  One of the key questions is the impact this move by Cisco will have on Microsoft.  Cisco and Microsoft have both actively pursued the goal of delivering a combined unified messaging and UCaaS solution (Cisco with Spark and Microsoft with Teams / Skype for Business).  Q Advisors believes that Microsoft will need to react to Cisco’s UCaaS move in a meaningful way, particularly as it relates to the channel, as well as the SMB market,where the BroadSoftsolutions have historically played particularly well.  It would be logical to see Microsoft pursue a large, independent UCaaS provider such as 8×8, Jive Communications or Ring Central.

In any case, the consolidation activity in the space is almost certain to increase in coming months.  There are rumors and market speculation that many of the largest independent UCaaS providers are assessing their strategic paths forward, including potential M&A activity.  We think the Cisco-BroadSoftannouncement likely increases the certainty that one or more of those deals occurs, particularly given the increasingly competitive UCaaS environment with Cisco’s involvement.  At the same time, private equity interest in the space remains robust.

One factor to keep an eye on is how Cisco’s UCaaS entrance will ultimately impact the pricing environment in the market.  Some have speculated that over time, Cisco could look to leverage its market position to raise prices on the BroadSoft solutions.  In this environment, smaller independent proprietary UCaaS platforms could emerge as potential winners by offering lower-cost solutions that are more responsive in maintaining leading-edge feature functionality, and by becoming more niche or vertical focused. Companies with the potential to benefit in this scenario could include Centile, DialPad, EvolveIP, Netsapiens, OnSip, Star2Star and Swyx. Our assessment is that current BroadSoft resellers will seek to acquire their own proprietary platform as a way of “de-risking” their reliance on BroadSoft-Cisco.

A Negative Impact on Hardware Providers in the BroadSoft Ecosystem

In our view, the group that will be most negatively impacted by the deal is the ecosystem of hardware players that provide the handsets, routers and other equipment integrated into the BroadSoft-powered solutions delivered by the Company’s service provider customers.  This group includes Polycom, Yealink and others that partner to integrate handsets and video devices into BroadWorks and BroadCloud.  Cisco will be able to integrate and bundle its own equipment with the BroadSoft software solutions and seems likely to move aggressively to shift partners away from other hardware providers.  How quickly that happens remains to be seen, but in the medium to long-term, it appears highly likely that it will severely impact the hardware players who have geared a significant portion of their business towards BroadSoft in recent years.

Key Questions and Potential Challenges

There are a number of questions and potential challenges that the two companies will need to address to ensure a successful outcome.  These include:

• Channel:  Cisco and BroadSoft sell through very different channels with different approaches, certification requirements and drivers.  BroadSoft has historically focused principally on the service provider channel, while Cisco has a much broader channel strategy that includes large VARs and systems integrators.  It will be interesting to watch whether the channel strategies mesh or continue to work independently.  BroadCloud gives Cisco a direct-to-enterprise solution, but how is potential channel conflict managed with this offering? For example, will Cisco discontinue the BroadCloudoffering?
• Product Overlap:  While the BroadSoft suite appears destined to become the core of Cisco’s UC&C cloud strategy, how will it co-exist with Cisco’s HCS product?  BroadSoft has been making great strides in moving upmarket to compete with Cisco and Microsoft, so how the combined Cisco-BroadSoft differentiates these products in the channel and the overall product roadmap will be interesting to watch.  Future branding has not been publicly addressed, but will also be a key decision point.
• Integration:  On a related note, it will be interesting to watch how quickly and how successfully Cisco is able to integrate BroadSoft, both from an overall company perspective and a technology perspective.  Among the factors to watch are how Cisco’s on-premise Call Manager solutions will integrate with BroadSoft’s cloud offering for those customers desiring a hybrid approach.  Furthermore, how well will BroadSoft augment Cisco’s Spark effort, or will it replace Spark?  The BroadSoft solutions appear well-suited to tie into Cisco’s current offering, offering APIs that should allow for seamless integration.  Nevertheless, how the different pieces come together, including branding and channel differentiation, will be important to the ultimate success of the deal.

Conclusion

Assuming the successful completion of the transaction, Cisco’s acquisition of BroadSoft will fundamentally alter the UCaaS landscape and accelerate the trend towards cloud-based communications.  We see the move as a natural and logical move for Cisco and highly complementary from a product and customer perspective. The impact on the overall market remains to be seen, but we view additional consolidation activity as inevitable, and likely sooner than later.  While the integration and go-forward plan faces many interesting questions, we think Cisco emerges as the clear leader in unified communications with the ability to target all segments of the market with a comprehensive suite of solutions. We also see a very positive impact on independent proprietary operators who will be able to ride the consolidation wave and exit at higher multiples.

Sources: (1) S&P Capital IQ, (2) Synergy Research Group

Michael Quinn / Partner / quinn@qllc.com

Michael Quinn, founding partner of Q Advisors, brings a unique and highly valuable background to telecom, media, and technology (TMT) investment banking that combines finance, hands on M&A experience, and law. With more than 25 years of international operations and investment banking experience in the telecommunications industry, Michael has originated, structured, and executed more than 100 deals totaling more than $4 billion in transaction value. Michael’s deep industry expertise and extensive transaction experience has enabled him to lead M&A and debt and equity financings in a variety of TMT sectors including cloud and managed services, competitive wireline telecom, wireless, digital media, social networking, mobile content, satellite and mobile infrastructure and solutions. He has led transactions for Q Advisors’ clients including: Arkadin, Atlantic Tele-Network, Inc., Broadcore, Broadsmart, Grande Communications, Hudson Fiber, IFX, Masergy Communications, Motto, One Source Networks, and WildBlue Communications. Michael brings to the table a reputation as a creative problem solver; passionately committed to obtaining the optimal results for the firm’s clients.

Gerry DeHaven / Partner / dehaven@qllc.com

Gerry DeHaven has over 25 years of investment banking, operating and consulting experience in the telecom, media, and technology (TMT) markets. Gerry’s investment banking experience includes M&A and debt and equity financings in a variety of TMT sub-sectors including cloud services, telecom, internet infrastructure, IT services, data center, and unified communications. He has worked with both emerging companies and large organizations including Alteva, Broadvox, CallTower, CMS, Excel, General Telecom, IDT, Motto, Net Access, Net2Phone, NGT, Saturn Telecommunications, Simple Signal, Transbeam, Transcend United, UNSi, VoIP Logic, Wall Street Networks, and X5 Solutions.

Andrew Gaffney / Managing Director / gaffney@qllc.com

Andrew Gaffney has over 20 years of investment banking and corporate finance experience, leading numerous strategic transactions including mergers and acquisitions, recapitalizations and debt and equity financings. Andrew has worked with clients in a range of telecom, media, and technology (TMT) sectors including cloud communications, managed services, media and technology. His clients include Broadcore, Broadsmart, IFX, Ripple Resort Media, Simple Signal and Telovations.

About Q Advisors

Q Advisors LLC (www.qllc.com) is a world-class global boutique investment bank formed in 2001 serving public and private companies, PE firms, entrepreneurs and large multi-nationals in the telecom, media, and technology (TMT) sectors. The firm has extensive, global reach, while also providing the personalized service of a boutique advisory firm. Thanks to our partners and senior staff, who come from leading investment banks and operating companies, we leverage extensive industry knowledge and analytical insights to help

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Categories: Industry Viewpoint · Mergers and Acquisitions · Telecom Equipment · Unified Communications