Zoom’s abandoned Five9 deal shows hurdles to expansion By Reuters

By Krystal Hu, Svea Herbst-Bayliss and Echo Wang

(Reuters) – Zoom Video Communications (NASDAQ:) Inc’s aborted $14.7 billion acquisition of call center software firm Five9 (NASDAQ:) 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 29% 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 $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.

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