Analysis: Zoom’s deserted Five9 deal reveals hurdles to enlargement

27

Oct 4 (Reuters) – Zoom Video Communications Inc’s (ZM.O) aborted $14.7 billion acquisition of name middle software program agency Five9 Inc (FIVN.O) has spotlighted points that may weigh on the digital assembly large’s subsequent try to develop by way of dealmaking, analysts and funding bankers mentioned.

Zoom’s unwillingness so as to add money to its bid and rely solely on its inventory as foreign money to pay for the Five9 deal backfired after its shares slipped by as a lot as 29% within the weeks after the deal was introduced in July, on considerations that the return to bodily conferences because the COVID-19 pandemic wanes will erode its enterprise.

Five9 shareholders voted down the deal final week. learn extra

Investment bankers and analysts mentioned Zoom’s inventory would seemingly stay risky till buyers set up what the prospects of its enterprise will probably be as soon as the pandemic is over. This decreases the probabilities of one other acquisition goal accepting Zoom’s shares as foreign money within the close to time period, they mentioned.

Zoom carries nearly no debt nevertheless it had solely $2 billion in money as of the top of July, which it must fund development initiatives.

“Zoom has to figure out how to keep some of the customers that signed up as individual subscribers that may not need Zoom when they return to more physical lives,” mentioned Alex Zukin, an analyst at Wolfe Research.

Zoom declined to remark.

Another hurdle that would give the subsequent firm that may entice Zoom’s acquisition curiosity pause is its ties to China. U.S. prosecutors charged a former China-based Zoom government final yr with disrupting video conferences commemorating the thirty first anniversary of the Tiananmen Square crackdown on the request of the Chinese authorities.

A U.S. Justice Department-led committee mentioned final month it was reviewing Zoom’s proposed acquisition of Five9 to see if it “poses a risk to the national security or law enforcement interests.” learn extra

While Five9 shareholders voted down the Zoom deal earlier than that evaluate concluded, analysts mentioned the regulatory intervention uncovered a threat that may proceed to weigh on the minds of different acquisition targets.

“The U.S. government is likely to give increased scrutiny to transactions involving companies with engineering talent or other operations in China,” mentioned Sujit Raman, a former U.S. Associate Deputy Attorney General who’s now companion at regulation agency Sidley Austin LLP specializing in authorities investigations.

ACTIVIST HEDGE FUNDS

Zoom sought to amass Five9, whose name middle software program is utilized by greater than 2,000 firms throughout the globe to work together with their purchasers, providing extra merchandise past its flagship teleconferencing. Without any transformative acquisition, Zoom shareholders are prone to develop anxious over the corporate’s reliance on digital conferences, whose reputation has peaked, some buyers mentioned.

Dianne McKeever, chief funding officer of funding agency Ides Capital Management mentioned it was doable that an activist hedge fund would search to make the most of the state of affairs by amassing a stake in Zoom and push for modifications.

“When a deal falls apart, forced selling by often short-term focused, event driven funds can create an outsized valuation opportunity for a long-term investor,” McKeever mentioned.

Examples of firms that attracted the wrath of buyers after botching an acquisition try abound. Hedge fund TCI Fund Management, one of many greatest buyers in Canadian National Railway Co (CNR.TO), is looking on the railroad’s CEO to resign following its failed $29 billion acquisition bid for Kansas City Southern (ZM.O). learn extra

Activist hedge funds Starboard Value LP and Elliott Management Corp have amassed stakes in Willis Towers Watson Plc (WTY.F), whose $30 billion merger with insurance coverage dealer Aon Plc (AON.N) was referred to as off earlier this yr due to objections from U.S. regulators.

To ensure, Zoom’s inventory could also be costly for some activist hedge funds, analysts mentioned. It can be not apparent whether or not there can be an acquirer for Zoom, which is one thing some activist hedge funds would possibly push for.

Still, a failed deal might be interpreted by some buyers as a sign by an organization’s board that it can not unlock extra worth, mentioned Lawrence Elbaum, co-head of regulation agency Vinson & Elkins LLP’s shareholder activism observe.

“This immediately makes their board seats vulnerable in an activism campaign,” Elbaum mentioned.

Reporting by Krystal Hu, Svea Herbst-Bayliss and Echo Wang in New York
Additional reporting by Eva Mathews and Nivedita Balu in Bengaluru
Writing by Anirban Sen; enhancing by Diane Craft

The Zoom Video Communications logo is pictured at the NASDAQ MarketSite in New York, New York, U.S., April 18, 2019.  REUTERS/Carlo Allegri