Echo Wang and Svea Autumn-Bayliss by Krystal H
(Reuters) – Zoom Video Communications (NASDAQ) Inc’s $14.7 Billion acquisition of Five9 call center software company Five9 was canceled (NASDAQ:) Inc analysts and investment bankers highlighted the issues that would impact Inc’s next move to grow through dealmaking.
Zoom’s inability to raise cash and use its stock to fund the Five9 deal has backfired. In fact, its shares fell by 29% within weeks of the announcement in July. This was due to concerns about the business being impacted by the COVID-19 pandemic.
Last week, five9 shareholders rejected the agreement.
Analysts and investors said Zoom stock would be volatile until the market determines what its prospects are after the pandemic. According to them, this reduces the chance that another target will accept Zoom’s shares in currency.
Zoom is almost debt-free, however it only had $2 billion cash left at the close of July. It needs this money to support growth projects.
Alex Zukin of Wolfe Research said, “Zoom must find a way to retain some customers signed up as individual subscribers who may not require Zoom when they return home to more physical life.”
Zoom did not respond to our request for comment.
The company’s ties with China could be another obstacle that might give Zoom its acquisition interest. A former Zoom executive based in China was charged last year by U.S. authorities with interrupting video conferences commemorating 31 years since the Tiananmen Square crackdown. This charge was made at the request from the Chinese government.
Last month, a U.S. Justice Department committee reviewed Zoom’s acquisition of Five9 in order to determine if there was a “risk to national security or law enforcement interest.”
Even though Five9 shareholders did not vote down the Zoom deal prior to the review, analysts believe that other potential acquisition targets will be affected by the regulatory intervention.
Sujit Raman (a former U.S. Attorney General) stated that the U.S. is expected to increase scrutiny of transactions involving Chinese companies employing engineering talent. Associate Deputy AttorneyGeneral, who now works as a partner in Sidley Austin LLP. She specializes on government investigations.
ACTIVIST HEDGE FUNDS
Zoom was interested in purchasing Five9’s call center software, which is used by more then 2,000 companies around the world to connect with their clients. Five9 offers more services than its flagship teleconferencing. Zoom shareholders may be worried about Zoom’s use of virtual meetings. Their popularity has reached its peak.
Dianne McKeever from Ides Capital Management, the chief investment officer said that there was a possibility of an activist hedge-fund looking to profit by Zoom’s situation and press for reforms.
McKeever stated that forced selling can be a good option for long-term investors if a deal is not working out.
There are many examples of businesses that have been unable to complete an acquisition and attracted investor ire. TCI Fund Management is a major investor in Canadian National Railway.
Starboard Value LP, Elliott Management Corp and activist hedge funds Starboard Value LP have acquired stakes in Willis Towers Watson Plc. The $30 billion merger of insurance broker Aon Plc with Willis Towers Watson Plc was stopped earlier this year due to objections by U.S regulators.
Analysts stated that Zoom’s stock could be costly for some activist hedge fund investors. Also, some activists might try to get Zoom’s acquisition.
Still, a failed deal can be interpreted by some investors as a signal by a company’s board that it cannot unlock more value, said Lawrence Elbaum, co-head of law firm Vinson & Elkins LLP’s shareholder activism practice.
Elbaum stated that this immediately renders their boards seats susceptible to an activist campaign.