Genesys and Interactive Intelligence – The First Domino
The announcement by Genesys that the company has reached an agreement with Interactive Intelligence to acquire their competitor for $1.4B will have a major impact on the overall market, both in Contact Centers as well as in the more general Business Communications marketplace.
First, the details of the deal are interesting (but only for those who really like to understand business details). InIn (Interactive Intelligence) has had some significant financial challenges over the last two years. During this period, InIn has focused on moving from a CAPEX premises model to a cloud model.
While the acceleration in growth in cloud has significant long term value through ongoing annuity revenue, the short term impact has been two consecutive years of net income losses. Assuming that the ratio from EBITDA to Net Income is about 10% of revenue, a common industry amount, with a current InIn revenue run rate of around $420M and a continued loss as in the last two years of about $15M, that would suggest an EBITDA of about $27M ($42M- $15M). With a $1.4B purchase price, that puts the deal at over 50 times EBITDA. Based on conversations with financial analysts familiar with Private Equity purchases, a multiple of 8-10 times EBITDA is common, so this acquisition seems to reflect a strong belief by Genesys and Permira, the PE firm behind Genesys, that they can significantly increase their overall business volume/margin/EBITDA by the merger. Even with a 20% cost synergy on the InIn revenue (eliminating $84M of cost out of the InIn business), the EBITDA multiple is still in the 12x range. Clearly this high purchase price reflects the ability of Permira to raise money in today’s debt market. On the other hand, in the last reporting quarter, InIn had around $200M of cash, investments, or equivalents on hand, indicating that at least $1.2-1.3B of the acquisition will have to be financed by debt. Assuming $1.25B in bonds to finance the acquisition with a rate of 8% (typical for highly leveraged buyouts, often higher), the annual interest payments will be $100M. To make the payments on this debt load, the business will require significant restructuring or incredible growth to generate the necessary EBITDA/cash.
Another potential challenge is company culture. InIn has long been a tightly knit dedicated team, based primarily in Indianapolis. Anyone who has gone to their annual event, held in Indianapolis, can clearly see both the local nature of the company, as well as the almost fanatical dedication of the employees to Dr. Don Brown, a charismatic leader who has built InIn from the start. How will this culture merge with a California culture, rooted in Silicon Valley and now managed by the processes of Private Equity? As the new combined organization changes to optimize the elements of the business: development, operations, sales, marketing, etc., will the resulting changes enhance or detract from the InIn culture that has succeeded in building a $400M annual business?
A significant question is how Microsoft will react to this merger. In 2014 Microsoft was openly positioning InIn as the touted Contact Center solution for Skype for Business (then Lync) adopters. In 2014, after InIn announced Pure Cloud that included a UC capability that is competitive with SfB, the relationship seemed to change. In fact, at Ignite in 2015 and Enterprise Connect in 2016, Microsoft had shifted their focus to Genesys as the mentioned Contact Center vendor. How will Microsoft react to Genesys now owning and selling a competitive cloud UC solution to SfB?
Next is what this means to Avaya and the potential sale of Avaya assets. Avaya has publicly stated that the company is actively in the process of investigating the sale of assets, in fact the company retained Goldman Sachs to manage the potential sale of assets and CenterView Partners to manage a capital restructuring effort. The view in the financial industry has been that the Avaya Large Contact Center business is the crown jewel and that the most probable path forward for Avaya was to sell that asset for somewhere in the $3.5-4B range and then use that cash to restructure the debt and position the core Business Communications segments for growth. However, Genesys was considered to be the leading candidate from within the industry to potentially buy the Avaya CC business. By buying InIn, there is a high probability that Genesys is no longer in a position to consider an Avaya acquisition, either from a cash perspective or from a regulatory approval path. The result is that the Avaya path forward becomes a bit murkier, especially as Genesys had the potential to pay a higher price for the Avaya CC due to the synergies and potential cost savings that it could accrue by combining the businesses.
Next is what Microsoft will do. Will this cause Microsoft to reconsider its long held position that the Contact Center is an ecosystem capability that is built on top of the SfB platform and is open to any participant? Will Microsoft consider an Avaya CC purchase, something that was generally deemed unlikely before the Genesys/InIn move? Will Microsoft consider one of the smaller dedicated cloud players? Or will Microsoft make a competitive offer for InIn?
For the Avaya Contact Center, the consolidation in Genesys of InIn may spur Oracle to consider the Avaya Contact Center as an acquisition option. For Oracle, the opportunity to move the Avaya base from the generally proprietary CRM that is in most large corporate Contact Centers to the Oracle CRM and other products could be a major opportunity. However, Oracle is clearly focused on managing their customers’ transitions to the cloud, so the premises nature of the Avaya CC base may be a negative.
Another option for Avaya is Mitel. With a public strategy of consolidation and the ability to raise cash, does this open the door for Mitel to acquire assets of Avaya that would aid its growth through installed base acquisition. While Mitel has not been a primary contender in the Contact Center space, especially not in the large dedicated Contact Centers, the options may be interesting, or the Business Communications segment of Avaya may have higher interest.
The Business Communications and Contact Center markets have been ripe for consolidation. Where there were previously barriers based on geography, the emergence of VoIP and now cloud delivery is rapidly removing those barriers. The result is that the geographic market segmentation that existed in telephony is rapidly eroding in Business Communications in this millennium. This and the new competition from companies like Cisco and Microsoft is creating a market where size is critical, size engenders market muscle, but also synergistic cost reductions, from development and supply chain through marketing, sales, and operations. For all of these reasons, the ability of smaller vendors to compete and succeed will continue to be increasingly challenged. With the acquisition of InIn, Genesys has effectively taken one domino off the competitive board. Anytime a domino is taken off the board it drives other changes and competitive response. I believe we can expect to see a number of reactions and other mergers and acquisitions over the next few months/quarters as the industry positions for the coming battles in the cloud.