Analysis: Zoom’s abandoned Five9 deal shows hurdles to expansion

Oct 4 (Reuters) – Zoom Video Communications Inc’s aborted $14.7 billion acquisition of name middle software program agency Five9 Inc has spotlighted points that can weigh on the digital assembly big’s subsequent try to increase by dealmaking, analysts and funding bankers stated.

Zoom’s unwillingness so as to add money to its bid and rely solely on its inventory as forex 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 issues that the return to bodily conferences because the COVID-19 pandemic wanes will erode its enterprise.

Five9 shareholders voted down the deal final week.

Funding bankers and analysts stated Zoom’s inventory would possible stay risky till buyers set up what the prospects of its enterprise shall be as soon as the pandemic is over. This decreases the possibilities of one other acquisition goal accepting Zoom’s shares as forex within the close to time period, they stated.

Zoom carries nearly no debt but it surely had solely $2 billion in money as of the tip of July, which it must fund progress initiatives.

“Zoom has to determine methods to hold a few of the clients that signed up as particular person subscribers that will not want Zoom once they return to extra bodily lives,” stated Alex Zukin, an analyst at Wolfe Analysis.

Zoom declined to remark.

One other hurdle that would give the following firm that can appeal to 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 Sq. crackdown on the request of the Chinese language authorities.

A U.S. Justice Division-led committee stated final month it was reviewing Zoom’s proposed acquisition of Five9 to see if it “poses a threat to the nationwide safety or legislation enforcement pursuits.”

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

“The U.S. authorities is probably going to present elevated scrutiny to transactions involving firms with engineering expertise or different operations in China,” stated Sujit Raman, a former U.S. Affiliate Deputy Lawyer Common who’s now companion at legislation 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. With none transformative acquisition, Zoom shareholders are more likely to develop anxious over the corporate’s reliance on digital conferences, whose reputation has peaked, some buyers stated.

Dianne McKeever, chief funding officer of funding agency Ides Capital Administration stated it was attainable that an activist hedge fund would search to benefit from the state of affairs by amassing a stake in Zoom and push for adjustments.

“When a deal falls aside, compelled promoting by usually short-term targeted, occasion pushed funds can create an outsized valuation alternative for a long-term investor,” McKeever stated.

Examples of firms that attracted the wrath of buyers after botching an acquisition try abound. Hedge fund TCI Fund Administration, one of many largest buyers in Canadian Nationwide Railway Co , is asking on the railroad’s CEO to resign following its failed $29 billion acquisition bid for Kansas Metropolis Southern .

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

To make certain, Zoom’s inventory could also be costly for some activist hedge funds, analysts stated. It is usually not apparent whether or not there can be an acquirer for Zoom, which is one thing some activist hedge funds may push for.

Nonetheless, a failed deal might be interpreted by some buyers as a sign by an organization’s board that it can’t unlock extra worth, stated Lawrence Elbaum, co-head of legislation agency Vinson & Elkins LLP’s shareholder activism apply.

“This instantly makes their board seats susceptible in an activism marketing campaign,” Elbaum stated.

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

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