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Merger Arbitrage Mondays – Five9 Investors Betting On An Independent Future

  • September 27, 2021

Zoom Video Communications (ZM) has run into significant challenges when it comes to its first billion dollar acquisition. The company’s acquisition of Five9 (FIVN) presents an interesting situation. When an acquisition runs into hurdles, perceived or real, the spread on the deal normally increases to reflect the increased risk that the deal might not close.

We are seeing the exact opposite with the Five9 acquisition where the spread on the deal was 3.95% the week after the deal was announced and it even eclipsed 5% on August 6, 2021. The first roadblock the deal hit was on August 30, 2021, when the Federal Communications Commission (FCC) said that it won’t allow a “streamlined” review of the transaction and they would have to look deeper into the deal. The FCC was asked to refer the case to the Committee for the Assessment of Foreign Participation in the United States Telecommunications Service Sector for review, to determine whether this application poses a risk to the national security or law enforcement interests of the United States. Under normal circumstances, news like this would have caused the spread on the deal to increase significantly but what we saw was that the spread started going negative shortly after this announcement as you can see from our spread history chart below.

The second hurdle showed up on September 17, 2021, when proxy advisory firm Institutional Shareholder Services (ISS) recommended a vote by shareholders against Zoom’s deal for Five9, citing growth concerns. We normally do not see ISS recommend that shareholders vote against a deal. It did not help that in its latest earnings report, Zoom mentioned that its business could face potential risks related to Five9’s operations in Russia.

The latest hurdle faced by this deal came on September 21, 2021, when The Wall Street Journal reported that, “A Justice Department-led panel is investigating Zoom Video Communications Inc.’s deal to buy an American customer-service software company, citing potential national-security risks posed by the U.S. videoconferencing giant’s China ties.”

The spread on the deal dropped to -3.02% in the first week of September and continued to decline and is currently at an astounding -12.5%. At its current price Five9 is below where it was trading before the deal with Zoom was announced. This is partially because Zoom has dropped nearly 25% since the deal was announced and since this is an all stock deal, Five9 dropped along with Zoom. However Zoom and Five9’s stock became inversely correlated since the start of September reflecting investor expectations that the deal is unlikely to go through.

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