Mitel Corporation

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Mitel Corporation

350 Legget Drive
Kanata, Ontario K2K 1Y6
Canada
(613) 592-2122
Fax: (613) 592-4170
Web site: http://www.mitel.com

Public Company
Incorporated: 1971
Employees: 3,867
Sales: C$576 million (fiscal year ending March 1996)
Stock Exchanges: New York Toronto
SICs: 3661 Phone/Telephone Equipment; 3674 Semiconductors

Mitel Corporation is an international supplier of telecommunications products and solutions and a pioneer in integrating telephones and computers. Best known for its switching systems which enable small companies to route calls, Mitel is also the only Canadian manufacturer of custom-designed microchips. Through its business communications systems and semiconductor divisions, Mitel designs, manufactures, and markets business telephone systems and peripherals, computer-telephony integration (CTI) products, and microelectronic components. Mitel’s operations are located primarily in Canada, the United States, the United Kingdom, and Sweden. Ranked among the top 100 companies on the Toronto Stock Exchange, Mitel had revenues of C$576 million for the fiscal year ending March 1996.

Early History

In 1971, Michael Cowpland and Terence Matthews, two British-born engineers, incorporated Mitel Corporation in Ontario, Canada. Two years later, the duo left their jobs with Microsystems International Ltd., a subsidiary of Northern Telecom, and Mitel commenced its high-tech operations, putting together printed circuit boards for telephone switches. Their timing was excellent. The 1968 deregulation of U.S. giant American Telephone and Telegraph (AT&T) created a demand for telephone equipment, and Cowpland and Matthews responded.

1973–81: A High Flying High-Tech Company

Mitel carved out a niche for itself producing high-quality, economically priced telephone switching equipment. Mitel’s first big winner was a tone receiver that converted the “beep” from a touch telephone to regular telephone signals. This made it possible for central telephone switching offices to decode the signals from push-button telephones. Two years after starting operations, Cowpland and Matthews’ tiny two-person company had transformed into a business employing 30 people with annual sales of C$300,000. In 1975, Mitel introduced a more sophisticated tone-to-pulse converter that made touch telephones compatible with any telephone system. In 1976, the company set up a semiconductor division so that Mitel engineers could design their own integrated circuits. In 1979, the year AT&T began allowing its 23 Bell System companies to buy Mitel telecommunications equipment, Cowpland and Matthews introduced the device Mitel was to become famous for—an electronic public branch exchange (PBX) for small companies.

PBX was an internal switching system that routed calls within an organization and to the outside world. It allowed people within a company to make interior or exterior calls, and for incoming calls to be directed to the correct party, without having to go through telephone company wires. When U.S. regulators said that private companies had to be allowed to buy their own switching systems and plug them into existing telephone lines, the demand for PBXs exploded. Within three years, Mitel’s PBX products, for companies with 10-160 lines, were the hottest-selling telephone systems in the United States, taking 14 percent of the fast growing PBX market.

Mitel was flying high, with sales doubling each year. As Pauline O’Connor of Canadian Business wrote in 1982, “Their ability to do this, year after year for almost a decade, earned them both the awe of their colleagues and the adulation of investors whose huge cash infusions were critical to keep the company growing. Stock market investors pumped $250 million into the firm since 1979 in hopes of getting a ride on that endlessly soaring growth curve.” Mitel had become a huge operation, with 13 plants and 4,200 employees around the world. In mid-1981, the company’s stock was selling at $48. But then the company was hit with a double whammy: the biggest recession in 30 years and a slowing in the United States’ PBX market.

1981–84: Trying to Make It in the Big Leagues

As Mitel president and chairman respectively, Cowpland and Matthews now faced a challenge common to successful entrepreneurs. Could they survive their rapid growth and keep Mitel in the big leagues? The answer depended on how they dealt with three factors: the company’s financial base, markets, and management.

First, Mitel needed to consolidate its financial base. Since 1977, Cowpland and Matthews had paid for Mitel’s growth by selling stock, with less than 30 percent of the company’s expansion financed by its own revenues. With the market down, that option was no longer available. Mitel had to turn to banks to borrow the $200 million it needed for expansion between 1982–1984. That was a big jump from the $47 million in bank debt it had been carrying.

Second, Mitel needed to expand its markets, since sales to the maturing U.S. market accounted for 90 percent of the company’s revenues. Mitel chairman Matthews, began marketing Mitel’s products to Europe and the Third World, setting a sales goal of $100 million by 1985. His efforts resulted in an $80 million, 4-year sale to Mexico’s government-owned telephone company, a $22 million sale to British Telecommunications, and a $10 million contract to upgrade hotel switchboards in Italy. In France, he won an agreement to build a plant free of government ownership ties. When the Socialists won in national elections, that plan was put on hold and eventually scrapped.

Mitel chose a good time to diversify its markets. In Britain, where Mitel had opened a sales office in the mid-70s, British Telecom was about to lose its monopoly and needed to upgrade its equipment to be able to compete. Mitel’s British manufacturing plants, licensing agreements with British manufacturers, and network of private distributers placed the company in an excellent position to serve the British telephone equipment industry. Other European countries were also beginning a major overhaul of their archaic telephone systems and Third World countries wanted to build their telephone infrastructure. In 1981, there were approximately 43 phones for every 100 people in Western Europe, compared to 70 for every 100 Canadians and 73 for every 100 Americans.

The third factor Mitel needed to address was its management. As O’Connor explained in her Canadian Business article, “Of the handful of high-tech firms to survive such rapid growth without either running out of cash or losing financial control, all have had to restructure from top to bottom.” With only minor reorganization, however, Cowpland and Matthews continued to operate through a “team approach,” building consensus throughout the organization, and giving existing personnel major responsibilities. By the end of the fiscal year, in March 1982, company revenues had risen 85 percent to C$204 million and profits were up 99 percent to C$34 million. Sales to international markets reached C$50 million, from only C$6 million two years earlier.

The year 1982 saw two major developments which kept Mitel in a strong competitive position. The first was the anticipated completion of the company’s new SX-2000, a digital switch able to handle voice, data, and video signals over as many as 10,000 lines. With this new technology, companies could use PBXs to direct electronic mail, telexes, computer data, and video images. The second development was the signing of an agreement in principle with IBM to co-develop a family of switching systems that would link IBM mainframe computers to the office of the future. But the year saw profits cut in half and revenue growth slowed to only 25 percent.

Cowpland and Matthews initiated an austerity program. Mitel closed its Burlington, Vermont plant and laid off the 150 workers there as well as 346 more people at three other U.S. plants. It also halted construction of a new facility in New Brunswick. But problems continued. Because of design issues with its software program, the SX-2000, due out early in 1983, fell behind schedule. Mitel’s attempt to produce a big PBX required it to shift from the analog technology used in its smaller switching systems to digital technology, and that development cost the company a lot of money.

To add to its frustrations, the PBX market in the U.S. was heating up again as AT&T’s local subsidiaries were spun off into seven regional companies, the “Baby Bells.” These companies were free to buy and sell telephone equipment as they pleased. With 22 companies manufacturing PBX systems, the $1 billion market was ripe for a shake-out, and the delay in shipping the SX-2000 put Mitel in danger of losing some of its customers.

Then in June, IBM announced it was buying a 15 percent share of the California-based Rolm Corp., which manufactured a rival of the SX-2000. That move ended the agreement between Mitel and IBM, and the stock market reacted strongly, with Mitel’s share price falling to a low of C$14. The company was in the red for fiscal 1984, its first loss in the ten years it had been doing business. Part of the deficit could be explained by the drop in Mitel’s share of the U.S. market, down to 11.6 percent, and the costs of closing the Burlington facility. The primary factor, however, was the amount of research money spent on the SX 2000.

Company Perspectives:

The Company’s mission is to be a world leader in creating communications solutions that provide exceptional value to its customers. Our leadership strategy is centred on advancing people-to-people communications in an open, distributed and standards-based environment.

Finally, in early 1984, Mitel began shipping its large PBX systems. At the same time, the company continued its austerity measures, selling its Irish subsidiary, Mitel International, as well as a C$10 million plant under construction in Buctouche, New Brunswick to another high-tech company. The company also cut back on its approximately C$65 million in R&D spending, laid off staff, and reorganized its planning operations. To help get costs under control, Cowpland and Matthews brought in a management consulting firm. Despite these efforts, Mitel lost money for the second year in a row.

1985–92: Ownership Turmoil

British Telecommunications pic came to the rescue of the nearly bankrupt company in 1985, paying about $217 million for a controlling 51 percent of Mitel stock. The purchase gave British Telecom entry into the North American market through both Mitel’s manufacturing and international distribution activities. Matthews and Cowpland both left the company that they had founded 14 years earlier.

Initially, investors were hopeful that the capital from the sale and British Telecom’s involvement would restore Mitel’s financial health. But in 1990, after five years, British Telecom went looking for a buyer for the company. In 1992, the British firm sold its Mitel holdings to Schroders Ventures, an international venture capital and management buyout group, for a total of C$66 million (US$55 million).

1993–95: Alliances and CTI

The purchase by Schroders Ventures marked the beginning of a turnaround for Mitel. Early in 1993, Dr. John B. Millard, who had run his own consulting company before moving to Nippon Electric Co. of America, was appointed president and CEO of Mitel. Soon afterward, Dr. Henry Simon, chairman of Schroder Venture Life Sciences Advisors, was named chairman of the board at Mitel.

From the start of his tenure, Millard talked about linking telephone systems with computers to make a single network for transmitting voice along with text, video, and images. The company quickly began research and development activities into this new technology called computer telephony integration (CTI). According to a corporate White Paper, Mitel believed that “the real potential of CTI lies in the value that is created by the integration of the people and relationship aspects of business with [an organization’s] business processes and technology infrastructure.” One of its first steps, therefore, was to examine the different requirements needed by users at the desktop, workgroup, and enterprise levels.

Over the next few years, Mitel took two approaches to implementing CTI. First, the company built on its PBX systems, moving that technology toward the world of computing by opening its architecture to third-party developers and interfacing to the computer network. With this approach, as Mitel’s Annual Report explains, “a telephone switch passes certain call information to a computer, allowing the computer to manage the call based on a command from a software application.” Using the Mitel Telephony Applications Interface (MITAI), a toolkit, developers designed products such as FastCall software to automate incoming and outgoing calls on a personal computer, the CallProducer server to add telephony to a local area network, and Phone ware software that could manage e-mail, contact databases, personal information managers, and voice and fax mail managers. Mitel also produced the Superset console series of video display terminals. These CTI products worked with Mitel’s LIGHT series of PBX switching systems.

Mitel’s second approach to CTI was through its Client Server Telecom (CST) division. Here, the company started with the computer and added telephony functions directly to it, creating a single platform for computing and telecommunications. This approach did not use the PBX as its platform, developing instead an open architecture communications system that could be used alone, as a workgroup server, or in conjunction with a PBX. As Joanne Chianello explained in an article in the Ottawa Citizen, “With only one server, users will be able to manage their voice mail, e-mail, faxes and printing. When on the road, workers will be able to call into headquarters and, using the buttons on a phone pad, order e-mail and faxes to be sent to a new fax number. They can even have the computer system read messages to them using text-to-voice technology.” The new server-based platform, called MediaPath, was developed in alliance with Digital Equipment Corporation and Microsoft Corp.. Mitel also signed an agreement with Lannet Data Communications Ltd to develop a new switching module to connect MediaPath with a local area network (LAN).

But the company’s Business Communications Services included more than CTI. The LIGHT series of PBX switches used fiber-optic cables to send signals made up of pulses of light rather than pulses of electricity, as occurred with digital switches. The company formed a “Multimedia Alliance” with Unisys to manufacture and distribute equipment that allowed cable operators to offer telephony. In 1995 Mitel introduced a new calling number identification chip (caller ID) that made it possible to identify a calling number on Call Waiting. The chip was to be used in advanced fax machines and intelligent answering machines to screen out “junk” transmissions.

Mitel’s other major area of business was in semiconductors. The development of CTI and other telephony devices required custom-designed microchips. With its 20 years experience creating integrated circuits, Mitel was the only company in Canada with the facilities to manufacture such microchips. The company’s semiconductor business grew from $51 million in 1992 to $120 million in 1995.

1996 and Beyond: Semiconductors and CTI

The year 1996 saw Mitel continue its turnaround, with record sales in the first two quarters. “We have a race between two growing divisions—semiconductors and the computer-telephony products which are really coming on,” Millard told the Ottawa Citizen in October.

Early in the year, Mitel completed the purchase of ABB Hafo AB of Sweden, a Swedish semiconductor plant. That acquisition increased Mitel’s production capacity, which had become backlogged with orders at its semiconductor manufacturing facilities in Caldicot, Wales and Bromont, Quebec. Mitel Semiconductor AB was also expected to develop its own line of integrated circuits for the medical, industrial, and space markets. By October 1996, semiconductors accounted for 31 percent of Mitel’s revenues, up from 20 percent the year before.

In the CTI area, the company introduced several new products, including its prototype telephone that plugged directly into a personal computer. Mitel was the first telecommunications company in the world to take the Universal Serial Bus (USB) concept and use it for a plug-in telephone. As Tom Davis described it in his article in PC Week, “When the phone starts to ring, components that link the PC to caller ID instantly place an image or icon representing the caller in a corner of the recipient’s monitor. The user can choose to answer it in the traditional manner or take advantage of several call-routing options.” Because it took advantage of the Universal Serial Bus in plugging into the PC, the phone still worked while the computer was turned off, and the computer continued to handle other tasks while processing calls.

In June 1996, field trials began of NeVaDa (Networked Voice and Data), the latest step in the on-going evolution of Mitel’s PBX systems. NeVaDa allowed customers to run voice as well as video and data over a single fiber-optic line in an enterprise-wide local area network. NeVaDa, uses a switching mechanism developed in alliance with Madge Networks Inc. of The Netherlands, which bought Lannet Data Communications. The device was selected Voice Integration Product of the Year at the 1996 Networking Industry Awards in Birmingham, England.

The NeVaDa network was expected to create more interest in the SX-2000 LIGHT PBX system. That could only help Mitel’s core PBX sales which had decreasing revenues because of competition and a maturing market. By the end of 1996, CTI products were only about five percent of sales in the company’s business communication systems division, but the market for CTI was expected to reach $8 billion by the end of the century.

After three years of talking about CTI, Millard was able to tell his shareholders, “Now we actually have the products getting ready to generate significant revenue. That’s a good feeling.” With its semiconductor business growing so strongly, the company appeared able to weather the period it would take for its CTI products to make a major contribution to Mitel’s revenues, assuming that the CTI market lived up to its promise. Mitel was optimistic that CTI would carry the company into the end of the century.

Principal Subsidiaries

Mitel, Inc. (U.S.A.); Mitel Telecommunications Systems, Inc. (U.S.A.); Mitel Telecom Limited (United Kingdom); Mitel (Far East) Limited (Hong Kong); Mitel Semiconductor AB; Mitel de Mexico S.A. de C.V. (Mexico; 49%); Tianchi-Mitel Telecommunications Corporation (China; 50%).