$14.7 Billion Five9 Acquisition Aims to Revive Zoom’s Growth

The pandemic has boosted Zooms’ revenue growth. But as the pandemic draws to a close, Zooms’ organic growth is slowing.

To fix that problem, Zoom, whose stock is trading 35% below its October 2020 high, announced it would pay $14.7 billion in shares to acquire Five9, a cloud-based customer service software provider.

Unfortunately, growth through acquisition is risky, as most acquisitions do not recoup their investment. Can Zoom’s Five9 deal succeed for the four tests for successful acquisitions?

I think it can pass the market attractiveness test; however, it’s too early to say whether the combined companies will be better off, whether Zoom can recoup its investment, and whether the two companies will be well integrated.

(I have no financial interest in the securities mentioned).

Zooms $14.7 billion deal to Five9. to acquire

Zoom is spending about 14% of its current market cap to acquire Five9, according to the Wall Street Journal.

Zoom says the deal, expected to close in the first half of 2022, will expand its potential offerings to corporate and corporate customers.

Investors reward companies that grow faster than they expect. Unfortunately, Zooms’ revenue growth is slowing, although it is still exceptionally high. In 2020, Zooms’ revenue grew 326%, according to, CNBC. In the first quarter, the company reported growth of 191% to about $956 million, the Journal reported.

Meanwhile Five9 with which Zoom already has a collaboration according to the deal prospectus accelerated its growth in the first quarter of 2021. Five9s’ revenue increased 32.3% to $435 million in 2020, and it grew 45% to $138 million in the first quarter.

Five9 is optimistic about the deal. CEO Rowan Trollope who will remain in his position and become president of Zoom reports to Yuan was enthusiastic. As he said, joining forces with Zoom will give Five9’s enterprise customers access to the best solutions, especially Zoom Phone, that will enable them to realize greater value and deliver real results for their business, the Journal said.

Customer Service Software Market Attractiveness

I think this deal passes the market attractiveness test.

Zoom says the deal will enable it to seize a major opportunity in the $24 billion contact center market, according to the prospectus. That’s significantly larger than the video conferencing market, which is projected to grow at an average rate of 11.4% to $9.95 billion by 2028, according to Grand View Research.

Zoom sees the trend towards hybrid working as a tailwind for growth. As Yuan said, the trend towards a hybrid workforce has accelerated over the past year, with advancing contact centers shifting to the cloud and customer demand for tailored and personalized experiences.

Unfortunately, it is unclear whether the contact center software market is profitable. After all, Five9 reported a net loss of $42 million in 2020, representing a negative net margin of 9%. The good news is that Five9 generated about $37 million in free cash flow last year, according to YahooFinance.

Zoom and Five9’s ability to increase market share

It remains to be seen whether the combined companies will be able to gain market share in their respective markets.

Zoom sees an opportunity for the two companies to cross-sell. Yuan said the deal will improve Zooms’ customer presence. He noted that the Five9s service will complement its Zoom Phone cloud phone system.

Yuan sees an important cross-selling opportunity in two directions. Five9s Contact Center [it claims more than 2,000 customers] can help accelerate momentum in Zoom Phone and bring Five9’s leading contact center solution to Zoom’s nearly 500,000 global customers, he said.

Will this deal threaten opportunities with customers of Five9s call center software rivals?

Yuan strives to maintain its partnerships. As he mentioned, we recognize that an open partner ecosystem is a key benefit of Zoom, it drives innovation and gives customers more choice and flexibility to meet their unique needs. We expect to maintain our partnerships to continue to support the contact center of the customer’s choice.

How much additional revenue will Zoom generate from the sale of Five9s services than it could through its current partnership? The answer will help determine whether the combined companies are ultimately better off.

Net Present Value of Five9 Acquisition

Is Zoom Paying Too Much for Five9? The answer depends on whether the net present value (NPV) of the deals is greater than zero, the present dollar value of the additional cash flows that the deal entails minus the acquisition price.

I haven’t seen any cash flow projections from Zooms for this deal, so I can’t judge if the NPV is positive.

I created a quick spreadsheet to estimate how fast Five9’s free cash flow would need to grow in the first decade after the deal went through for the NPV to be positive.

Assuming Zooms’ cost of capital is 7.3% and Five9s’ 2020 free cash flow was $37 million, I estimated that the deal would generate a positive NPV of $686 million if free cash flow grew at an average annual rate of 60%. would grow.

That seems like a big step to me, as Five9s FCF grew just 16% between 2019 and 2020.

Another way to see if Zoom has overpaid is to estimate whether the combined company will grow faster than investors expect. That remains to be seen.

Zoom and Five9 integration

Integrating two companies deciding who will do what in the combined company and setting up the business processes to work seamlessly from the customer’s perspective after the deal is closed is critical to the success of a merger.

By that measure, it’s too early to know whether the two companies will be well integrated. The good news is that the two share a common culture and the role of Five9s CEO is clear, as I noted above.

Yuan and Trollope are former Cisco executives. As CNBC noted. Yuan founded Zoom in 2011 after helping build WebEx that Cisco acquired in 2007. Yuan told me that Cisco’s management of WebEx was embarrassing him, so he left to start Zoom.

Trollope spent 22 years at Symantec, joined Cisco in 2012, became senior vice president with responsibility for all of Cisco’s collaboration products, and left in 2018 to lead Five9, according to CNBC.

Yuan says the two organizations share a common culture of obsession with customer happiness and that our collective focus and drive will be vital as we move forward.

Yuan told employees the deal will open up new opportunities to drive growth in the contact center cloud. He said an integration team, led by experienced executives from both companies, will closely monitor the process.

Will the Zooms Five9 deal pass these four tests, with a 1.8% drop in the premarket on July 19? If so, the stock could regain ground it has lost since October last year.