A prominent shareholder advisory service recommends that shareholders vote against Zoom Video Communications’ plan to buy Five9 Inc.
Zoom (NASDAQ: ZM), a company that has famously benefited from the virtual nature of office interactions during the pandemic, announced the plan to buy Five9 (NASDAQ: FIVN) two months ago.
The deal would be an all-stock transaction valued at $14.7 billion. It is also the second-biggest U.S. tech sector deal announced this year, falling short of the size of Microsoft’s plan to purchase Nuance Communications.
Shares have lost more than 20% of their value in the two months since the deal was announced. On the one hand, that may be a market verdict against the wisdom of the sale.
On the other hand, the market may simply be saying that the pandemic is finally receding and the business world will get back to normal over the coming months, reducing the need for “Zoom meetings.” The 20% decline, then, may be read as a confirmation of management’s need to diversify by making such deals as this.
Will the Zoom Deal Be Halted?
Five9 is a provider of cloud-based call center software.
On Friday, proxy advisory firm Institutional Shareholder Services weighed in. It said that Five9 shareholders should vote against the deal, which is one that “exposes [them] to a more volatile stock whose growth prospects have become less compelling as society inches towards a post-pandemic environment.”
The deal made in July provides that Five9 shareholders will receive 0.5333 shares of Class A common stock of Zoom for each share of Five9. Based on the price at which Zoom closed on July 16, this represents a per share price of $200.28.
The directors of the two boards have approved the transaction with the expectation of a closing in the first half of 2022, and subject to “approval by Five9 stockholders, the receipt of required regulatory approvals and other customary closing conditions.”
So with ISS advising Five9 stockholders that they should withhold that approval, the deal is now regarded as troubled unless its terms are changed.
The stock slide since the deal has reduced the value of the deal to about $156 per Five9 share.
ISS said that Five9’s board wedded itself too quickly to Zoom without seeking “an auction process or a market check [as] evidence that the deal presented in fact represents the best available alternative.”
What are the Next Steps?
If it does want the deal to go through it might respond by sweetening the terms. It could improve the ratio of Five9 to Zoom shares in the proposed stock, or it could add a cash component.
A statement by the chief financial officer Kelly Steckelberg (before the ISS decision) indicated that Zoom might be inclined to try to hold the line. Steckelberg said, “there is meaningful value creation opportunity for both sets of shareholders [with the existing terms] as we drive a combined growth agenda going forwards.”
The ISS’ language might encourage Five9 to turn back toward the market for better deals. Indeed, in a filing with the U.S. Securities and Exchange Commission in August, Zoom indicated that there had been a competitive third-party bidder for Five9, although that party is not named in the filing.
One pertinent reflection: it isn’t at all clear that things are going to go ‘back to normal’ in the sense that may concern Zoom stockholders. “Delta” and other variants delaying any celebration of Covid-19’s demise. Also, people who have been able to give up the wearying commute have found Zoom empowering.
It has become more than a way of avoiding infection, and it will likely retain that appeal whatever happens as to the epidemiology. So Zoom can likely live without Five9.