Morgan Stanley says Zoom Video deal for Five9 answers a lot of growth concerns
Needham analyst Scott Berge downgraded Five9 (FIVN) to Hold from Buy after Zoom Video (ZM) announced it has entered into a definitive agreement to acquire the company in an all-stock transaction valued at $14.7B. Commenting on the deal, Baird analyst William Power said he views the combination as a "strong strategic fit," while a peer at Jefferies argued that the acquisition news could drive short-term weakness in both RingCentral (RNG) and Nice (NICE) given competitive concerns.
FIVE9 ACQUISITION: Zoom Video announced it has entered into a definitive agreement to acquire Five9 in an all-stock transaction valued at $14.7B. As part of the agreement, Five9 stockholders will receive 0.5533 shares of class A common stock of Zoom Video for each share of Five9. Based on the closing share price of Zoom class A common stock as of July 16, this represents a per share price for Five9 common stock of $200.28. The boards of Zoom and Five9 have approved the transaction. Following the close of the transaction, Five9 will be an operating unit of Zoom and Rowan Trollope will become a President of Zoom and continue as CEO of Five9.
MOVING TO THE SIDELINES: Following the news, Needham analyst Scott Berg downgraded Five9 to Hold from Buy. The analyst is positive on the company's sale to Zoom Video though he is "questioning" the timing after its "most impressive" reported quarter yet and its "massive" sales opportunity. Berg added that the premium of about 13% over Friday's close "seems lackluster," even though he expects the acquisition to enhance Zoom's ability to sell its Zoom Phone up market to large enterprise customers by leveraging the strong Five9 install base and brand.
STRONG STRATEGIC FIT: In his own research note to investors, Baird analyst William Power said he believes Zoom Video's plans to acquire Five9 for $200.28 per share in stock makes for a strong strategic fit. The analyst argued that it significantly expands Zoom's long-term platform opportunity and that the valuation is reasonable for both companies. Power maintained his Outperform rating and $445 price target on Zoom Video and his Outperform rating on Five9 shares.
Voicing a similar opinion, Mizuho analyst Siti Panigrahi said he views Zoom Video Communications' announced acquisition of Five9 as a "sensible strategic action." The deal preserves Zoom's Tier 1 brand while moving into the natural contact-center adjacency and growing its total addressable market by $24B, Panigrahi told investors in a research note of his own. The analyst applauded the deal and said he believes investors will receive it positively. Panigrahi kept a Buy rating on Zoom with a $400 price target.
Also commenting on the news, Citi analyst Tyler Radke said he sees the deal as helping better complete Zoom's platform vision. The acquisition "could be a differentiator and a catalyst for future Zoom phone migrations," Radke contended. He believes the deal is a "potential positive" for Zoom, despite expected dilution. Radke has a Neutral rating on Zoom with a $380 price target.
Meanwhile, Morgan Stanley analyst Meta Marshall told investors that her caution around Zoom Video has been that the valuation implied meaningful share of the Unified Communications market with little room for error as growth slowed from scale and churn. However, the company's proposed acquisition of Five9 "answers a lot of these concerns," the analyst contended. She thinks the premium being paid "seems reasonable" and the all-stock component de-risks the deal, leaving her "positively inclined" on the proposed acquisition. Marshall has an Equal Weight rating and $360 price target on Zoom shares.
SHORT-TERM WEAKNESS IN RINGCENTRAL, NICE: After Zoom Video announced its planned acquisition of Five9, Jefferies analyst Samad Samana said he "would not be surprised" to see a competing bid given the 13% premium is "modest." In addition, Samana contended that the combination of Five9, which is a leader in Contact Center as a Service, or CCaaS, and Zoom, which has a "dominant presence in videoconferencing" and is "a growing threat" in Unified Communications as a Service, or UCaaS, will certainly impact the broader industry and is likely to be viewed as a negative outcome for the other publicly traded enterprise communications companies. Given RingCentral's leadership in UCaaS and Nice's leadership in CCaaS, the analyst suspects investors will be most concerned regarding those two. However, he sees the multiple being paid for Five9 as beneficial to the valuation of the other enterprise communications vendors in the long run.
PRICE ACTION: In Monday morning trading, shares of Five9 have gained about 5% to $185.71, while Zoom Video's stock has dropped almost 4% to $348.26 and RingCentral has slid over 9% to $247.98.
Keywords: M&A, merger, business combination, acquisition