Exclusive: Mitel and Polycom in merger talks amid pressure from Elliott - sources

By Michael Flaherty and Liana B. Baker

(Reuters) - Canada's Mitel Networks Corp (Toronto:MNW.TO - News) is in talks to merge with U.S. peer Polycom Inc (NasdaqGS:PLCM - News), in a deal that would combine the voice and telephony equipment providers and heed the demands of hedge fund Elliott Management, sources said on Tuesday.

Mitel, the smaller of the two companies with a $1.11 billion market value, made the initial approach to buy Polycom, according to sources familiar with the matter, but the talks remain fluid and the final structure is still being worked out.

Both companies declined to comment. The sources did not want to be identified because the deal discussions are private. As in any merger discussion, the talks could proceed to a deal or collapse at the last minute.

Activist investor Elliott Management Corp has been calling for the two companies to merge since October, when the $23 billion hedge fund disclosed a 6.6 percent stake in Polycom and a 9.6 percent stake in Mitel.

The deadline for Polycom shareholders to nominate directors to stand for election at its annual meeting expires on Wednesday. Polycom has a market worth of $1.43 billion.

Elliott, whose stake in Polycom was worth $111 million as of Dec. 31, declined to comment.

Elliott said in October that it had established a "collaborative dialogue with Mitel," and believed the company could pursue an all-stock merger with Polycom, which would save on taxes because Mitel is incorporated in Canada.

A Mitel attempt to buy Polycom could require a significant portion of Mitel stock, given the difference in market value.

Mitel's shares are down more than 30 percent over the past 12 months while Polycom shares are down about 17 percent.

Mitel, which serves business customers with unified communications services, mostly over landline phones, has been aggressively buying up smaller telecom services firms over the past few years. Elliott's Mitel stake was worth $88 million as of Dec. 31, according to filings.

Mitel acquired U.S.-based Mavenir Systems Inc for $560 million last April and also bought Canadian telecom services company Aastra Technologies Ltd in 2013 for about $400 million.

The Ottawa, Canada-based company made an unsuccessful attempt to buy smaller U.S. peer ShoreTel Inc (NasdaqGS:SHOR - News) in 2014.

Polycom, which benefited during the 2008 recession from companies looking to cut travel costs by holding meetings over the phone, has been struggling to cope with fierce competition from Cisco Systems Inc (NasdaqGS:CSCO - News) and from free video conference software such as Microsoft Corp's (NasdaqGS:MSFT - News) Skype.

(Additional reporting by Greg Roumeliotis in New York; Editing by Leslie Adler)