Zoom Video Communications Inc's aborted US$14.7 billion acquisition of call center software firm Five9 Inc has spotlighted issues that will weigh on the virtual meeting giant's next attempt to expand through dealmaking, analysts and investment bankers said.
Zoom's unwillingness to add cash to its bid and rely solely on its stock as currency to pay for the Five9 deal backfired after its shares slipped by as much as 29per cent in the weeks after the deal was announced in July, on concerns that the return to physical meetings as the COVID-19 pandemic wanes will erode its business.
Five9 shareholders voted down the deal last week.
Investment bankers and analysts said Zoom's stock would likely remain volatile until investors establish what the prospects of its business will be once the pandemic is over. This decreases the chances of another acquisition target accepting Zoom's shares as currency in the near term, they said.
Zoom carries almost no debt but it had only US$2 billion in cash as of the end of July, which it needs to fund growth 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," said Alex Zukin, an analyst at Wolfe Research.
Zoom declined to comment.
Another hurdle that could give the next company that will attract Zoom's acquisition interest pause is its ties to China. U.S. prosecutors charged a former China-based Zoom executive last year with disrupting video meetings commemorating the 31st anniversary of the Tiananmen Square crackdown at the request of the Chinese government.
A U.S. Justice Department-led committee said last 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."
While Five9 shareholders voted down the Zoom deal before that review concluded, analysts said the regulatory intervention exposed a risk that will continue to weigh on the minds of other acquisition targets.
"The U.S. government is likely to give increased scrutiny to transactions involving companies with engineering talent or other operations in China," said Sujit Raman, a former U.S. Associate Deputy Attorney General who is now partner at law firm Sidley Austin LLP specializing in government investigations.
ACTIVIST HEDGE FUNDS
Zoom sought to acquire Five9, whose call center software is used by more than 2,000 companies across the globe to interact with their clients, offering more products beyond its flagship teleconferencing. Without any transformative acquisition, Zoom shareholders are likely to grow anxious over the company's reliance on virtual meetings, whose popularity has peaked, some investors said.
Dianne McKeever, chief investment officer of investment firm Ides Capital Management said it was possible that an activist hedge fund would seek to take advantage of the situation by amassing a stake in Zoom and push for changes.
"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 said.
Examples of companies that attracted the wrath of investors after botching an acquisition attempt abound. Hedge fund TCI Fund Management, one of the biggest investors in Canadian National Railway Co, is calling on the railroad's CEO to resign following its failed US$29 billion acquisition bid for Kansas City Southern.
Activist hedge funds Starboard Value LP and Elliott Management Corp have amassed stakes in Willis Towers Watson Plc, whose US$30 billion merger with insurance broker Aon Plc was called off earlier this year because of objections from U.S. regulators.
To be sure, Zoom's stock may be expensive for some activist hedge funds, analysts said. It is also not obvious whether there would be an acquirer for Zoom, which is something some activist hedge funds might push for.
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.
"This immediately makes their board seats vulnerable in an activism campaign," Elbaum said.
(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; editing by Diane Craft)