Exchange Providers Azaleos and M3TG Merge

Two companies in the MS Exchange ecosystem have merged:

  • Azaleos, founded in 2004, provides remote monitoring and management services for Exchange.
  • M3 Technology Group, founded in 2002, is a system integrator specializing in Exchange and Active Directory.

The announcement was made on March 16, 2009. The new company will be headed by the current Azaleos management team and will trade under the Azaleos brand.

Products, Facilities, and Competitors:

  • Combined Azaleos/M3TG is essentially Azaleos as before, with its Exchange remote management services, but with an expanded set of managed services and much stronger professional services.
  • Azaleos has more than 70 customers, and M3TG has a similar number. Customers include Chiquita, Alcon, Wendy’s/Arby’s, and Extended Stay.
  • Azaleos has its own monitoring and management software whereas M3TG used MS System Center.
  • Two NOCs, in Seattle (Azaleos) and Charlotte, NC (M3TG).
  • Main competitors are big systems integrators such as HP, EDS, IBM Global; Exchange hosting firms; and the status quo where customers continue to maintain their own on-premises Exchange systems.

Trading Performance:

  • Combined business has around 130 people.
  • Ferris Research estimates revenues of the combined business at $15M-$20M.
  • Azaleos and M3TG have seen year on year revenue growth but neither company has been trading profitably.
  • Ferris Research does not anticipate profitability in the near term.

Funding History and Transaction Summary:

  • Azaleos has had three funding rounds, the third in late 2008, totaling about $17M. We do not have any details for M3TG, but it appears they have had at least two funding rounds, perhaps on the order of $2M.
  • Azaleos received VC funding from Ignition and Second Avenue Partners and M3TG from Frontier Capital and Ed Crutchfield.
  • Deal based on a share exchange; no cash has changed hands. Azaleos shareholders clearly hold the majority of shares in the combined company.

Investor and Management Motivations:

  • They consider that the greater resources of the combined businesses will help attract more and larger customers.
  • M3TG's professional services and Active Directory expertise significantly enhance Azaleos's remote management capabilities.
  • Ferris Research believes that M3TG was financially distressed.

Ferris Research Comments:

  • It may be that the greater resources of the combined team will make it easier to garner large organization business and also to achieve profitability.
  • Azaleos's original business was to sell a remotely managed Exchange appliance; the market for this was limited and now its revenues are dominated by pure services.
  • Where organizations outsource Exchange support, they typically do so to large integrators, and where Exchange support is simply one aspect of a much larger contract. Azaleos and M3TG both are at a disadvantage in that they can only address a small part of such broad application portfolios. The merger will not resolve this competitive disadvantage.
  • It is now becoming practical to outsource Exchange to remotely hosted Exchange servers, through such major offerings as Microsoft Exchange Online. This presents a longer-term threat to Azaleos.
  • Azaleos/M3TG is a services business. These do not require a lot of capital, and should be able to grow organically. Thus we suggest that Azaleos/M3TG should perhaps cut its costs and get into profitability soon. That's healthy for a services firm.
  • All in all, the merger is a good step for Azaleos and helps build out an attractive services offering.

Points of Disagreement with This Bulletin:

  • Azaleos disagrees that big systems integrators (e.g., HP, EDS, IBM Global) are major competitors. VP Marketing Scott Gode says, "Companies frequently tell us before signing that the precise reason why Azaleos is interesting to them is because we are not a large SI/outsourcer and that they explicitly don't want to give all of their business to one company. Additionally, we supply our service to IBM who resells it under their brand."

... Mike Stackpoole and David Ferris

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