Zoom’s fast ascent to $100 billion made acquisitions a sudden priority

Zoom founder Eric Yuan poses in front of the Nasdaq building while the video conferencing software company Zoom logo is displayed on the screen after the opening bell on April 18, 2019 in New York City. The video conferencing software company announced its IPO at $ 36 per share, which is an estimated $ 9.2 billion.

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As a public company, it took Salesforce 14 years to reach a market capitalization of $ 100 billion. Getting there took three billion-dollar acquisitions and four different revenue streams.

When Zoom topped the $ 100 billion mark last year, it had been public for a little over 14 months. The company relied on a single product and had only made a tiny acquisition.

While it’s still a toddler on Nasdaq, Zoom is now forced to take on adult responsibility for investors thanks to its unexpectedly rapid ascent. The video chat company’s historic growth during the Covid-19 pandemic has boosted its market capitalization from $ 9.2 billion at the time of its IPO in 2019 to a high of $ 159 billion in October, even with it for the time being Cisco is reached.

Zoom has lost roughly a third of its value since then, despite posting 191% revenue growth in the most recent quarter as investors prepare for a post-pandemic future and competition intensifies, especially from Microsoft Teams.

Still, Zoom is among the 25 Most Valuable North American Tech Companies and is the only one in this package that has gone public in the past four years. Shopify and Snap, which went public in 2015 and 2017 respectively, are the only companies in the group trading for richer multiple of sales.

In other words, the stock market gives Zoom the tools to become a major dealmaker. And Zoom is taking advantage of the fact that earlier this week it announced the purchase of Five9, worth $ 14.7 billion, which sells cloud-based software to call centers.

“It enables them to use their currency to buy high-impact things,” said Alfred Chuang, a partner in venture capital Race Capital who previously co-founded BEA Systems and sold it to Oracle in 2008 for $ 8.5 billion. “I can’t imagine this will be the last.”

The Five9 deal is one of the 10 largest US corporate software transactions, according to FactSet, and is bigger than any takeover by Amazon, Google, Oracle, Cisco or Adobe. At roughly 23 times Five9’s expected revenue for 2022, it’s also the second-most expensive software deal on a price-to-revenue basis, behind just Salesforce’s $ 27 billion purchase of Slack earlier this month.

Chuang, who has been friends with Zoom CEO Eric Yuan since pre-Zoom at WebEx, says Yuan is now in a position familiar with Salesforce CEO Marc Benioff, who is worth $ 240 billion as of mid-2018. Dollar has more than doubled.

Both companies are focused on being cloud consolidators as automation changes the future of work and builds the enterprise software stack of the future, Chuang said. In the three years since reaching a market cap of $ 100 billion, Salesforce has closed more than $ 4 billion, including Slack and the $ 15.7 billion purchase of Tableau.

“Not everything worked out,” said Chuang, but he argues that even if business is currently in good shape, it is important to take big turns.

“When you have a very fast growing company and you are becoming very successful, most people don’t want to rock the boat,” he said. “Acquisitions are not only useful for attracting customers, they are extremely important in fulfilling any product vision you may have.”

The Cisco connection

Zoom’s first conversations with Five9 were made last year, according to people familiar with the matter. The CEOs, who both previously worked on collaboration products at Cisco, know each other well and forged product integration in 2019 when Zoom launched a phone offering.

Yuan was a senior engineer at WebEx when the company was acquired by Cisco in 2007, and Rowan Trollope, CEO of Five9, led all of Cisco’s collaboration products, including WebEx, until he joined Five9 in 2018. At Cisco they never overlapped – Yuan went to start Zoom a year before Trollope joined – but the connection is key as they both saw the challenges of retrofitting an old tech company for the cloud age.

Acquisition talks cooled off for a while and picked up again in the past three months, said people with knowledge of the transaction who did not want to be named because the talks were confidential. At this point, Goldman Sachs began advising Zoom on a deal and Five9 hired Frank Quattrone’s Qatalyst Partners.

Zoom also redistributed internal responsibilities earlier this year, entrusting CFO Kelly Steckelberg with responsibility for business development, a position previously held by operations manager Aparna Bawa, said people close to the cause. Yuan and Steckelberg pushed the Five9 deal forward, people said.

Bawa has taken on more responsibility elsewhere in the business. She oversees security, privacy, and government relations, all of which were at the fore when Zoom became a widespread service in large corporations, as well as in education, healthcare, and religious organizations.

Zoom and Five9 representatives declined to comment.

At a Morgan Stanley investor event in March, Steckelberg was asked about Zoom’s plans for the call center.

“Contact center is an absolutely important part of the telephone strategy,” said Steckelberg. “The way we do it today is partnership. We have great relationships with Five9. Eric and Rowan are very good friends.”

Zoom’s goal is not just to be a video service for meetings with colleagues and customers, but to become the center of all work communication, including for customer service representatives in call centers.

Yuan went one step further on Zoom’s quarterly earnings call in June. When an analyst asked about the expansion of the contact center, he replied to investors, “Hold on, you will see something.” He then suggested that details surrounding the company’s Zoomtopia conference could be revealed in September.

“I hope we can do more,” he said, suggesting that Zoom could go beyond integrating with call center technology providers.

Buy vs. build

A big reason a deal took so long was because both stocks were so volatile, said people familiar with the talks. Zoom and Five9 stocks moved 10% or more multiple times in a single week that year, making it difficult to come to an agreement. Ultimately, the purchase price was a modest 13% premium over Five9’s last closing price prior to the announcement.

The deal is expected to close in the first half of 2022 and Trollope will continue to lead Five9 as President of Zoom. Five9 adds projected revenue of $ 650 million next year to the $ 4.8 billion analysts anticipate from Zoom, according to StreetAccount.

In the investor call following the announcement, Yuan and Trollope said that mutual customers had told them they wanted to rely on a single provider to provide communications technology for internal purposes as well as for customer service. Zoom could invest in developing the product itself, but customers “don’t want to wait,” Yuan said.

Analysts such as BTIG’s Matt VanVliet said the decision to buy rather than build was the right one.

“Overall, we are encouraged by Zoom’s strategy to boost its platform with this acquisition rather than relying solely on its own in-house R&D costs, which would have taken years to scale,” wrote VanVliet, who has a buy recommendation for Zoom, in one Report on July 19.

Zoom has a long way to go before it can claim to have a portfolio of cloud software products like Salesforce, Adobe, and ServiceNow.

At the end of last year, the company entered the field of live events with the introduction of a self-developed product called OnZoom, expanded the video platform beyond the workplace and relied on online meetings of some kind to continue. In July, Zoom hired Abhisht Arora, a 21-year-old Microsoft veteran and team program manager, to lead corporate strategy and report directly to Yuan.

Between new product development and large-scale acquisitions in parallel markets, Yuan seeks to ensure that Zoom is more than just a pandemic stock and that its status as a corporate giant will last long after Covid-19 passed.

– CNBC’s Alex Sherman contributed to this report.

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