Zoom/Five9: dropped deal is good call

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Zoom Video’s near-$15bn acquisition of call centre software company Five9 is off. Shareholder opposition and regulatory scrutiny made the deal a hard sell from the start. Rising bond yields and retreating technology stock valuations cut the cord.

This is a blow to Zoom’s efforts to expand beyond video calls and keep growth humming as workers return to the office and students go back to school. The prospect of cross-selling to corporate clients was tempting.

Still, hanging up makes sense. Five9, which makes software that allows companies to provide customer support across email, chat, text and phones, was expensive. The company is lossmaking despite 20 years of business. Under the terms of the all stock transaction, Zoom would have paid about 26 times Five9’s forward sales. Rival Twilio, which made four times more revenue than Five9 last year, trades on a lower multiple.

For Five9 shareholders, a near-30 per cent drop in Zoom’s market value since the deal was announced in July made the tie-up unpalatable. They are right to follow the recommendation from proxy advisory firm Institutional Shareholder Services and reject it. The deal originally implied a 13 per cent premium to Five9’s then-share price. Zoom’s subsequent market valuation decline means Five9 would have sold itself at a 15 per cent discount. Zoom’s connections to China also meant the deal had prompted national security scrutiny.

Zoom could have tried to salvage the agreement by sweetening its offer. Raising the share ratio was one option. Adding a cash component was another. Zoom has about $5bn in cash on its balance sheet with no debt. But opting to do so would have probably started a revolt among Zoom’s own shareholders.

Walking away is the most logical option on both sides. The split is amicable and will not affect the two companies’ existing partnerships. Analysts still expect Zoom to grow its top-line over the next three years. It has space to consider a more economical move into adjacent markets.