Merger activity decreased last week with five new deals announced and six deals completed. Three of the five deals announced last week were multi billion dollar deals. The acquisition of Five9 (FIVN) by Zoom Video Communications (ZM) was the largest deal announced last week. In the past two years Zoom Video Communications (ZM) has gained momentum during the COVID-19 pandemic as people across the globe started working from home and school continued remotely due to the lockdown. The acquisition of Five9 will enable Zoom to enhance its presence with enterprise customers.
Zoom originally priced its IPO between $28 and $32 before pricing up and going public at $36 in April 2019. The stock closed its first day of trading at $62 implying a price/sales ratio of over 40 times trailing sales. This valuation was too rich for my liking and I decided to stay on the sidelines. Less than a year later the COVID-19 pandemic hit and the stock went parabolic. I did start a position in the early days of the pandemic as the world around us had changed and what had previously looked like very rich valuation seemed less so in this new world of remote work and school.
The stock eventually peaked over $568 this February and then gave back some of those gains in the ensuing months. Trading at $359, the stock is still expensive trading at 31 times trailing sales, 25 times forward sales and a forward P/E of 120. It makes perfect sense that Zoom is using its expensive stock to purchase assets like Five9 that will allow the company to enter adjacent markets. When Twilio (TWLO) acquired SendGrid in a $3 billion deal that almost didn’t happen, the market perceived that deal as indicating that Twilio’s organic growth had peaked and Twilio’s stock dropped after the deal was announced. As an investor in Twilio and a user of both products for several years, the deal made a lot of strategic sense to me and eventually the market warmed up to Twilio again. Zoom did not see its stock drop much in response to this deal either because the market saw the outcome of the Twilio – SendGrid deal or because partial remote work and school appear to be here to stay.
Five9 is a provider of cloud contact center software (“CCaaS”) and it has a $24 billion TAM (total addressable market). Five9’s TAM will join Zoom’s standalone $62B TAM for a cumulative TAM of $86B
Businesses spend significant resources annually on their contact centers, but still struggle to deliver a seamless experience for their customers,” said Rowan Trollope, Chief Executive Officer of Five9. “It has always been Five9’s mission to make it easy for businesses to fix that problem and engage with their customers in a more meaningful and efficient way. Joining forces with Zoom will provide Five9’s business customers access to best-of-breed solutions, particularly Zoom Phone, that will enable them to realize more value and deliver real results for their business. This, combined with Zoom’s ‘ease-of use’ philosophy and broad communication portfolio, will truly enable customers to engage via their preferred channel of choice.