Singer's Elliott Takes Twin Stakes in Polycom & Mitel, Pushes for Merger

Oct 8 2015 | 6:34pm ET

Paul Singer’s activist hedge fund Elliott Management has taken stakes in two telecom equipment makers and laid out an aggressive plan to consolidate their industry.

The fund disclosed stakes of approximately $100 million in Polycom and Mitel, equating to stakes of 6.6% and 6.3%, respectively, in the companies. The stakes put Elliott among the biggest shareholders of both firms, according to regulatory filings.

In conjunction with the disclosures, Elliott also sent a letter to Polycom’s board of directors in which it noted the company’s underperformance and urged a full strategic review of all options. The letter, written by Elliott senior portfolio manager and technology activist Jesse Cohn, argues that Polycom should pursue an industry consolidation strategy anchored on a merger with Ottawa-based competitor Mitel. 

Such a tie-up would combine two major providers of voice and video communications equipment together into a $2.5 billion enterprise with potential EBITDA of more than $500 million annually, according to Elliott. Importantly, the hedge fund noted that a deal between Polycom and Mitel would create a platform through which additional consolidation in the industry could – and should – take place. 

The upside could be considerable, in Elliott’s view. Polycom’s stock could reach more than $20 per share by the end of 2017, 50% higher than Polycom’s current price, under a merger scenario. Indeed, Elliott thinks Polycom could pay as much as $10 per share for Mitel in an all-stock transaction – which would also pay off handsomely for Elliott – and still yield a 95% return for Polycom shareholders by the end of 2018.

However, as has become typical following the news of major activist involvement in a stock, shares of both firms soared more than 16% in Thursday trading, taking a little of that potential upside off the table and incidentally earning Singer about $26 million on his newly-disclosed stakes. Nonetheless, the letter makes a strong case for a merger as a way to properly address competitive and other pressures in the telecom equipment industry.

Although its battles with South Korea’s Samsung C&T and Britain’s Alliance Trust have garnered headlines recently, Elliott is well known for shaking up Silicon Valley companies. It previously pushed for change at EMC, Riverbed Technology, Novell and Citrix Systems, among others.

Founded by Paul Singer in 1977, the firm’s flagship fund has returned about 14% annually, according to Bloomberg data, and has approximately $27 billion under management through a number of investment vehicles active in debt, equities, commodities, currencies and various other asset classes.

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