Final Countdown: 5, 9, Zoom
Zoom’s acquisition of Five9 is a great concept with a flawed execution. There’s a lot of reasons why the deal makes sense starting with the fact that both companies want it. There’s a strong cultural fit, and the combined portfolio has merit for both. I wrote all about it in this report. What makes this deal controversial is the way they structured it.
Zoom agreed to pay .5533 shares for each share of Five9 in an all stock deal AND expected the deal to close around 9-12 months from the handshake. The share exchange rate is clear, but they did not agree on the purchase price. WTF? It’s not like the share prices of these companies are stable, especially over an event horizon that’s almost a year. ZM shares went up more than 6x in 9 months last year, if that were to repeat it would mean Zoom agreed to pay more than $80B for Five9. Indeed there was a change, but not as big or in that direction.
When the deal was announced most of us focused on the current numbers as if that mattered. It appeared Zoom agreed to pay about $14.7 billion for Five9, or about $200/share. The number one question last July was if $200 was high enough? There was a decent argument that Five9 was worth more. The companies pitched it as a continuation of the story rather than an exit. That the Five9 shareholders were better off trading each share of FIVN for .5533 shares of ZM because the combined company would offer them a better return. It was like one of those 3D posters, if you stare at it long enough the logic was perfectly clear.
A few things have happened since July that make it less clear.
- Five9 announced its 2Q-21 results that included a 44% YoY increase in revenue, and a 50% increase in “enterprise” subscription revenue. The quarter was strong, but other than a temporary spurt the stock didn’t go up. That’s because FIVN is tethered (anchored?) to ZM. It really didn’t matter what Five9 reported, its shares are worth exactly .5533 of ZM shares.
- Unfortunately, ZM shares weren’t doing so well. Zoom reported its 2Q-22 in August and its results were also (mostly) impressive. It reported its first $1B quarter (exceeded estimates), but then warned of an expected increase in churn. Yikes! Churn is a four letter word in cloud as the whole business model is built on retaining customers. Missing estimates has less impact than the C word, so its share price dropped fast. Since Zoom is buying Five9 with stock, Five9 shareholders won’t be getting the $200/share – instead it will be about $165/share (in ZM stock). Of course, there is still time for that to change before this deal closes. Five9 delivered a great quarter, yet saw its valuation/exit drop about 18%.
- Adding insult to injury, Talkdesk announced that it did a series D and managed to get a $10B valuation. At an estimated $200M in revenue, that’s a valuation of around 50x revenue. For comparison, Five9 got about half the multiplier on more than double the revenue (and then increased its revenue). I covered this more in the August Insider Report.
The Five9 shareholders that were suspicious of the original $200/share, are now frenzied and heading to a shareholder meeting (Sep 30). That’s when/where the vote for the acquisition. Operators are standing by, and the outcome is anyone’s guess. So let’s guess.
The most likely outcome is Zoom will sweeten the deal. That would make everyone happy, and that is Zoom’s thing. There’s a few ways to do this. They could increase the rate of ZM stock exchange, they could sweeten the pot with some cash, or possibly give every Five9 shareholder a Zoom Pro account and and Neat Frame. It would be some combination of trinkets that restores the perceived value of $200/share. This is the least disruptive path. It will end up costing Zoom $2.6-2.8B which is about how much it saved by going light on Zoomtopia swag earlier this month.
If Zoom doesn’t sweeten the deal, the most likely outcome is the Five9 shareholders will ixnay the proposal. The headwinds against this deal are stacking up: too low of a price, Zoom’s ominous prediction of churn, Td’s $10B valuation, supposed government concerns over national security, and Five9’s stellar growth. Though voting against management is risky, and Rowan likely has already selected his office at Zoom regardless of the shareholder vote. If the deal does fall thru, FIVN will see a nice jump back to a free-market valuation. It’s a leader in the growing CCaaS sector. One ramification of the deal falling thru is all the competitors will need to revise their strategies again.
If the concern is the Five9 jewel is being sold at a bargain, then there’s also the possibility that another vendor swoops in with a better offer. Five9 is certainly a desirable acquisition target, but there are not that many logical suitors that can take-on Zoom in a bidding war. This deal has been on the table since July, so time is running out. Two options I see are Salesforce and Twilio.
Salesforce is logical but unlikely. Logical because it’s all about CX. Dreamforce just ended, and the messaging had all the nouns and verbs of CCaaS. However, its primary channel to the customer is now Slack, specifically Slack Connect. Five9 would be helpful if customers insist on talking instead of texting. Otherwise Salesforce can turn to Vonage and Amazon (and others) for CCaaS + Service Cloud (BYOT). The combination of Salesforce and Slack is still developing, so another acquisition seems too soon. There was speculation that Salesforce bid against Zoom on Five9, but this week Salesforce COO Bret Taylor told reporters “we have not been, nor are we in, any conversations to acquire Five9.”
However, Twilio making a grab for Five9 is plausible and intriguing. I figure no one looked harder at that Talkdesk $10B valuation than Twilio CEO Jeff Lawson. Talkdesk is built on Twilio. Talkdesk and Five9 are up, and Twilio Flex hasn’t broken out yet (and TWLO has seen better days too). Five9 is much bigger than Td and it would be a great addition (and customer) for Twilio (and Segment). All the UCaaS and CCaaS providers are moving toward CPaaS (including Five9), so why shouldn’t a CPaaS provider move toward CCaaS? It would certainly make for a great topic at the upcoming Twilio Signal conference.
There’s always the possibility that Five9 shareholders approve the deal as it was conceived last July. Yes, there’s some headwinds and yes Institutional Shareholder Services (ISS) is recommending a no vote, but who has time to understand all these complexities? Institutional voters have time, but they tend to rubberstamp whatever management of a growing company wants. The outcome of the shareholder vote could go either way, but I doubt we will get that far. I expect Zoom will sweeten the pot.