Written by Norman Isaac Mwambazi

Zoom to buy Five9 in a record-setting all-stock transaction valued around $14.7B

One of the companies that greatly benefited from remote working and stay-at-home directives by companies and governments worldwide due to …

One of the companies that greatly benefited from remote working and stay-at-home directives by companies and governments worldwide due to the coronavirus pandemic last year was Zoom Video Communications Inc. (ticker: ZM), and it is continuing to do so.

At the height of Zoom’s stock surge last year, its stock price peaked at $568.34 a share on October 19, 2020, just a few weeks before Pfizer and BioNTech announced their discovery of the COVID-19 vaccine that gave hope of economic recovery and return of workers to offices. Since then, Zoom stock has dropped, and it is currently trading at $361.97 a share. However, this is still a 46.82% year-on-year rise.

With Zoom’s high-flying performance, it is looking to spread its performance even higher with the acquisition of Five9 Inc. (ticker: FIVN). Late Sunday, July 18, 2021, Zoom announced that it would buy Five9, a pioneer of cloud-based contact centre software, in an all-stock transaction valued at over $14.7 billion. Five9, which is the subject of this large acquisition, designs, develops, markets, and sells a highly scalable and secure cloud contact centre that delivers a comprehensive suite of easy-to-use applications. These applications allow the management and optimization of customer interactions across many different channels.

By buying Five9, Zoom has inserted itself into a mind-blowing year for Mergers & Acquisitions (M&A) that are highly attributed to high cash positions coming out of the COVID-19 pandemic and zero-level interest rates that the Federal Reserve Bank still maintains.

According to data from Goldman Sachs, over $1.9 trillion of deal value has been announced in the past six months for U.S.-based acquirers making it the highest volume of M&A at this point of the year since 2000.

David Kostin, the Chief U.S. Equity Strategist at Goldman Sachs, said high cash balances were brought about by the recession last year when companies accumulated debt and issued equity to stay afloat. Due to this, companies are deploying the available cash to acquisitions, and attractive companies like Five9 are the targets of these M&As.

According to data provided by Yahoo Finance, Zoom’s $14.7 billion acquisition price of Five9 marks a 24% premium to the company’s market capitalization that closed on Friday at $11.91 billion. The acquisition of Five9 is expected to boost Zoom’s presence with corporations to expand its popular Zoom Phone.

After the announcement of an acquisition yesterday, Five9 stock gained 7.3% in pre-market trading today, Monday, July 19, 2021, and it is currently trading at $177.60 a share. However, Zoom shares fell 3%, but this is nothing to worry about because investors typically react to all-stock transactions. It will most probably bounce back at the close of today’s trading session or in the coming days. Zoom currently has a market capitalization of $104.50 billion.

Speaking about the acquisition in a statement released yesterday, Zoom founder and Chief Executive Officer (CEO) Eric Yuan said Zoom’s acquisition of Five9 would help the company create a leading engagement platform between enterprises and customers through Five9’s cloud-based contact centre technology.

Five9 CEO Rowan Trollope’s words about the acquisition were in the line as Yuan’s, saying that, “Joining forces with Zoom will provide Five9’s business customers access to best-of-breed solutions,” highlighting Zoom’s cloud phone service called the Zoom Phone.

“This will give our customers more value and deliver real results for their business,” Trollope said.

This transaction is expected to be completed by Q2 FY2022, subject to the fulfilment of closing conditions like approval by Five9 stockholders and the receipt of required regulatory approvals. According to terms and conditions set out in the acquisitions documents, for each share of Five9, the company’s stockholders will receive 0.5533 shares of Class A common stock of Zoom.

Additionally, Five9 will become Zoom’s operating unit, with Trollope continuing as CEO. However, it will also become Zoom’s President reporting to Yuan, the founder and CEO of the new parent company Zoom Video Communications Inc.

This large M&A deal has third party actors on both sides of the agreement, with multinational investment bank and financial services company Goldman Sachs (ticker: GS) and tech-focused investment bank Qatalyst Partners acting as the exclusive financial advisors to Zoom and Five9, respectively.

It is worth noting that Zoom had its Initial Public Offering (IPO) in 2019, and as mentioned earlier, its performance in the last 18 months or so has largely been fuelled by the shift to remote work and online schooling due to the pandemic. During this period, Zoom saw its customers and revenue rise meteorically, positively impacting its stock’s performance in the market. After going public in 2019, Zoom’s Q1 FY2019 revenue exceeded both its own projection and Wall Street’s consensus estimate after it surged 191% year-over-year to about $956 million. Wall Street analysts had projected it to close the quarter at $905 million.

Zoom closed last year on a high note, with its Q4 FY2021 earnings report showing a sales surge of 369% to $882.5 million, exceeding estimates as work-from-home measures extended into early 2021 due to a surge of COVID-19 infections in the holiday season and early months of the year despite countries embarking on mass vaccination campaigns. Zoom’s report also showed its customers who have more than 10 employees using their software for business operations surged 470% to 467,100, also exceeding estimates for a jump to nearly 442,600.

An M&A slowdown

According to Goldman Sachs, the average $100 million-plus deal in 2021 so far has been struck at a 44% premium to the pre-bid price. This is still higher than the average deal premium to pre-bid price in the last 20 years, which has tallied at 32%. The financial institution projects S&P 500 companies to spend over $324 billion in cash on Mergers & Acquisitions in 2021. This is a rise of 45% from a year ago. However, Goldman Sachs also projects this growth to slow down by 5% to $340 billion, partly attributed to Biden Administration’s regulatory changes.

According to Kostin, Biden’s new antitrust regime has many implications for Mergers and Acquisitions, saying that completing such deals will become more burdensome as regulators scrutinize transactions. This will increase hurdle rates and deal break fees for mergers compared to what they used to be before Executive Order.

PS: “Current” share prices quoted here can change at any time.