By James Muse, Omar Santos, Sean Salamante (Columbia University), Martín Palomar GA, Leo Clement, Olivier Baverez (HEC Paris)
Photo: Chris Montgomery (Unsplash)
Overview of the deal
Acquirer: Zoom Video Communications
Target: Five9
Implied Equity Value: 14.7bn
Total Transaction Size:
Closed date: Failed Deal
Acquirer advisor: Goldman Sachs & Co. LLC
Target advisor: Qatalyst Partners
Zoom Video Communications, Inc. (NASDAQ: ZM) announced on July 18th, 2021 an agreement to acquire cloud contact center provider Five9, Inc. (NASDAQ: FIVN) at a transaction equity value of $14.7 billion representing a 13% valuation premium in an all-stock transaction. Five9 investors were to receive 0.553 shares of Zoom’s Class A common stock for every one share of Five9 stock. The transaction was supposed to mark Zoom’s fourth acquisition since the Covid-19 pandemic and the second largest U.S. tech transaction in 2021, ~$2bn less than Microsoft’s acquisition of Nuance Communications. After rallying over 400% since the start of the pandemic and growing revenues from $622.7mm to $2.65bn (+325.8%) this acquisition is a clear attempt to keep Zoom’s explosive growth on track. The synergies between Five9’s AI capabilities in the call-center space and Zoom’s global distribution network would have allowed for a more vertically integrated business model to compete with the likes of Cisco, which has already merged its contact center business with its Webex video conferencing software. Eric Yuan, founder and chief executive officer of Zoom, worked previously at Webex and has emphasized Zoom’s “open-partner ecosystem” as a key differentiator driving innovation and growth. In Zoom’s FY22 Analyst Day deck, the company expects a TAM of $91bn by 2025 and a 130% revenue CAGR from 2019 to 2022, which it plans on achieving through Zoom Phone a modern, cloud phone system and increased penetration from their video conferencing software (Zoom Rooms). Zoom is down 53% from its $559 peak on October 16th, 2020.
“Combining Five9’s Contact Center as a Service (“CCaaS”) solution with Zoom’s broad communications platform will transform how businesses connect with their customers, building the customer engagement platform of the future.” - (Eric S. Yuan, Founder and CEO of Zoom)
Company Details: (Acquirer - Zoom Video Communications, Inc.)
Zoom Video Communications, Inc. is an American company that provides video communication services. Zoom is headquartered in San Jose, California, and was founded in 2011 by its CEO Eric S. Yuan. The firm offers meetings, chat, rooms, workspaces, video webinars, and many others that serve many industries including education, finance, government, and healthcare.
Founded in 2011, headquartered in San Jose, California
CEO: Eric S. Yuan
Number of employees: 4,422
Market Cap: $79.5bn (as of October 1st 2021)
EV: $77.3bn
LTM Revenue: $3.6bn (LTM Jul ‘21)
LTM EBITDA: $1.1bn (LTM Jul ‘21)
LTM EV/Revenue: 29.5x
LTM EV/EBITDA: 95.3x
(Source: FactSet)
Company Details (Target - Five9)
Five9 is a leader in cloud-based contact center software. They have over 2000 customers worldwide and over 20 years of experience in cloud contact. With their platform, they are able to manage the customer experience from start to finish in a single architecture.
Founded in 2001, headquartered in San Ramon, California, USA
CEO: Rowan Trollope
Number of employees: 1550
Market Cap: $11.3bn
EV: $11.9bn
FY2020 Revenue: $435M
FY2020 EBITDA: $85.7M
Projections and Assumptions
Short-term consequences
Zoom became a household name and a popular investment during the pandemic as schools, businesses and other entities adopted their platform to hold virtual classes and meetings. However, with the rapid acceleration of vaccinations and a slow return to normalcy, Zoom needed to search for new revenue streams beyond their core video conferencing services, especially as competition mounts from Microsoft, Cisco, and Salesforce.
The acquisition of Five9 would have allowed for another tangential source of revenue, and a seamless way to bring customers a contact center offering, according to Zoom CEO Eric Yuan. That being said, this deal was not Zoom’s only option to bring customers a more holistic offering. The company plans to launch the Zoom Video Engagement Center, a cloud-based contact center solution, early next year. Following the cancellation of the deal, Five9 confirmed that the current partnership with Zoom would remain in place.
Additionally, the U.S. Justice Department began reviewing Zoom's proposed acquisition of Five9 due to possible national security concerns based on a document filed by United States regulators. However, analysts said the deal is likely to go through regardless. Zoom has also recently been scrutinized by the US government over their connection with China. Last year, a former Zoom executive was charged by US prosecutors for disrupting video meetings at the request of the Chinese government that commemorated the 31st anniversary of the Tiananmen Square crackdown.
Long-term Upsides
Zoom's short term vision is a matter of survival, but the deal they intended to execute revealed their long term vision is to establish themselves as a reliable cloud service provider for different industries. Their non-cloud-service revenues rely on a shrinking market, such shrinkage, which began immediately after sanitary restrictions were lifted, quickly translated into a 40% dip in zoom's stock. Five9 was in a very different situation : for years its share price had been stable. The reason for this stability is the company's market share (12% to 13% as of August 2021) which corresponds to the second position in the said market.
The call center cloud services sector has been in constant growth, Five9 multiplied its revenues by five between 2016 and 2021, Zoom could have used its size and its mastery of cloud services to leverage Five9's growth outlook and further its hold on the market controlled at 63% by Voxxify. More so, Five9 was following precisely that imperative of revenue growth and client acquisition, regardless of the 4% EBITDA which is significantly underwhelming for the SaaS sector.
Risks and Uncertainties
The announcement of the deal took little time to trigger investor and institutional mefiance : first came a steady decline of Zoom’s share price, down 23% by the twentieth of September ; then a storm of scrutiny fell upon Zoom and hindered its plans to acquire Five9. The US Department of Justice raised national security concerns over the acquisition noting that Zoom has had incidents with its operations in China. Namely, Zoom had mistakenly routed calls through China and one of their executives in the country had cooperated with local authorities to block the streaming of Tiananmen Square-related content in the US. American authorities are reluctant towards allowing companies that have relationships with or are owned by the Chinese to further expand their grip on the American communication sector.
The business outlook for Zoom also posed a problem and scepticism among analysts towards the acquisition. The future of Zoom’s revenues is uncertain now that the pandemic has ended. Zoom’s returns have become “less compelling” according to the Institutional Shareholder Services. Moreover the ISS recommended shareholders to vote against the transaction, based on political uncertainties regarding the deal and the underwhelming outlook for Zoom’s growth opportunities.
It comes as no surprise that Five9 shareholders concluded to terminate the deal following a meeting on Thursday September the thirtieth, a little over two months after the deal was originally announced.
“The all-stock deal exposes [Five9] shareholders to a more volatile stock whose growth prospects have become less compelling as society inches towards a post-pandemic environment,” - Institutional Shareholder Services