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 percent 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. US 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 US 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 US government is likely to give increased scrutiny
to transactions involving companies with engineering talent or other operations
in China," said Sujit Raman, a former US Associate Deputy Attorney General
who is now partner at law firm Sidley Austin LLP specialising in government
investigations.
Activist hedge funds
Zoom sought to acquire Five9, whose call centre 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.
Dianne McKeever, chief investment officer of investment firm
Ides Capital Management said it was possible that an activist hedge fund would
seek to take advantage of the situation by amassing a stake in Zoom and push
for changes.
"When a deal falls apart, forced selling by often
short-term focused, event driven funds can create an outsized valuation
opportunity for a long-term investor," McKeever said.
Examples of companies that attracted the wrath of investors
after botching an acquisition attempt abound. Hedge fund TCI Fund Management,
one of the biggest investors in Canadian National Railway Co, is calling on the
railroad's CEO to resign following its failed $29 billion acquisition bid for Kansas City Southern.
Activist hedge funds Starboard Value LP and Elliott
Management Corp have amassed stakes in Willis Towers Watson, whose $30 billion
merger with insurance broker Aon was called off earlier this year because of
objections from US regulators.
To be sure, Zoom's stock may be expensive for some activist
hedge funds, analysts said. It is also not obvious whether there would be an
acquirer for Zoom, which is something some activist hedge funds might push for.
Still, a failed deal can be interpreted by some investors as
a signal by a company's board that it cannot unlock more value, said Lawrence
Elbaum, co-head of law firm Vinson & Elkins' shareholder activism practice.
"This immediately makes their board seats vulnerable in
an activism campaign," Elbaum said. - Reuters