Zoom's $14.7 billion deal to acquire Five9 seemed like a slam dunk.
The videoconferencing company had massive success during the early days of the pandemic but was facing questions about its growth potential as more workers returned to the office this year. It was also under pressure to take advantage of a surging stock price, spend a $4 billion cash war chest and diversify beyond the core business.
But that ambition fell apart Thursday evening after Five9 shareholders rejected the proposed deal. One likely reason is that Zoom's all-stock offer suddenly became much less attractive after its shares declined by 29% in the weeks following the announcement of the deal. The deal was also facing increasing federal scrutiny given Zoom's ties to China, a relationship that is under federal review in New York and California, according to a recent regulatory filing.
"We believe that the opportunities for Five9 to continue to create value for shareholders on a standalone basis are significant," Five9 said in a statement.
The question, of course, is how much more money Five9 demanded — a hurdle that Zoom alluded to in its statement on the vote.
"While we were excited about the benefits this transaction would bring to both Zoom and Five9 stakeholders, including the long-term potential for both sets of shareholders, financial discipline is foundational to our strategy," said Zoom CEO Eric Yuan.
Zoom had already laid the groundwork for its next step into the enterprise. In 2019, the company launched Zoom Phone, a logical extension of its videoconferencing product and one that Microsoft is now trying to replicate with its own tool. While Zoom says it's sold over 2 million seats, there's skepticism over how fast it can scale.
So Zoom decided to try to tackle the call center. In theory, acquiring Five9 would have given Zoom access to the customer base of one of the market's top players — a small group that also includes Genesys and NICE inContact. The company's own noteworthy growth (Five9 revenue grew 44% last quarter to $144 million) would also help quiet investors while Zoom executed on its longer-term vision.
"It's going to take a while to get this Zoom telephony business really humming," Gartner analyst Drew Kraus previously told Protocol. "So one of the things it could do is buy a strong growth contact center company like Five9 and use that to show Wall Street: 'We're still dynamic, we're still growing.'"
Zoom's initial attempts to sell the deal, however, raised questions in the industry. The vision was to combine Zoom's video tools with Five9's contact-center software to create the customer engagement platform of the future. But industry experts believe it's unlikely such a product ever becomes widely used.
"That has been the next frontier for 25 years," said Kraus. "Companies that do pursue those projects end up abandoning them in the first year. The actual value of a customer service agent and customer to be able to see each other's faces ends up not being that significant."
The beat goes on
Zoom is still marching forward with its plans for the contact center. But without Five9, the strategy seems less clear.
Zoom has faced questions over the security of its conferencing platform. That could be a concern for enterprises thinking about deploying the tool in an area of the business that would result in a major PR nightmare should any breach occur.
And selling a contact-center product is far harder than convincing an enterprise to use Zoom's videoconferencing services. "It's not like deploying Zoom," Five9 CEO Rowan Trollope told Protocol prior to the announcement of the merger.
Companies often use multiple videoconferencing tools, and switching costs are low. Pivoting to a cloud-based contact center however, is one move that large enterprises don't take lightly. Gartner estimates that, by the end of 2021, contact-center-as-as-service, or CCaaS, will account for just 32.3% of the total cloud contact-center market.
Many are also locked into long-term contracts with on-premises software providers like Genesys that are now selling their own cloud-based products. And given the increasing importance of the call center in organizations, there's more attention on the tools being used to support the operation. That can ultimately benefit a legacy vendor that has a longer relationship with the customer.
"The larger your contact center, the more financially challenging it is for you to move away from whoever you're working with today," said Kraus.
Zoom, however, remains very confident it can succeed without Five9.
It plans to combine video with cloud-based contact-center software with a new product slated to launch in early 2022, though the company acknowledges it will need to maintain existing partnerships with the likes of Five9, Genesys and NICE inContact. Investors also appear bullish on a future that doesn't include Five9: Zoom's shares were up a little more than 2% in trading on Friday.
"We have also looked to acquire capabilities through M&A. Five9 was one such opportunity, as it presented an attractive means to bring to our customers an integrated contact center offering," Yuan said in a statement. "That said, it was in no way foundational to the success of our platform nor was it the only way for us to offer our customers a compelling contact center solution."
It's clear Zoom is willing to shell out a lot of money to buy revenue and quickly grow a new line of business. But without the infusion Five9 promised to bring, Zoom faces a much more difficult path forward to jumpstart its second act, particularly since there aren't many other companies with the prevalence of Five9 that it can look to acquire.
The company may be preaching financial discipline as the cause for the collapse, but in enterprise software, fortune favors the bold.
Correction: This story was updated to clarify that Zoom's stock declined after the announcement of its proposed deal.