Zoom and Five9 drop US$14.7 billion merger amid US security review over video-conference app’s operations in China

Five9 shareholders reject transaction after Justice Department added additional regulatory review to deal
Institutional Shareholder Services, an influential proxy adviser, urged Five9 investors to vote against the deal in part over political risks in Zoom’s ‘substantial operations in China’

Banking & finance

Chad Bray

Published: 11:09am, 1 Oct 2021

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Zoom Video Communications and cloud-based customer service provider Five9 called off their US$14.7 billion merger overnight on Friday, weeks after the US Department of Justice called for a national security review and an influential proxy adviser recommended against the deal in part because of Zoom’s China ties.

The companies said they “mutually agreed” to terminate the transaction after not enough of Five9’s shareholders voted in favour of the transaction.

“We had the opportunity to engage extensively with our shareholders since our transaction announcement,” Five9’s chief executive Rowan Trollope said in a press release. “We greatly appreciate their feedback and confidence in Five9’s future prospects and share their views regarding the significant potential for value creation as a stand-alone company.”

The deal collapsed after Institutional Shareholder Services (ISS), which writes independent reports evaluating deals and advise shareholders, urged investors to reject the transaction, citing in part potential political risk associated with Zoom’s “substantial operations in China”. ISS also cited Five9’s standalone prospects and the valuation of the proposed transaction in recommending against the deal.

02:06

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Last week, the Justice Department called for an inter-agency committee that reviews foreign participation in the US telecommunications sector to review potential risk raised by “foreign relationships and ownership” associated with the deal and determine whether it poses a threat to “national security or law enforcement interests.” It added an additional regulatory layer to an inquiry already being conducted by the Federal Communications Commission.

Zoom, based in San Jose, Calif., said at the time it expected to receive required regulatory approvals for the deal and for the transaction to still close in the first half of next year.

On Friday, Eric Yuan, the China-born American CEO of Zoom, said Five9 presented an “attractive means” to add an “integrated contact centre offering” to its product mix.

“That said, it was in no way foundational to the success of our platform nor was it the only way for us to offer our customers a compelling contact centre solution, ” he said in a blog post. “If one thing is certain here at Zoom, it is that we never rest on our laurels – we have the long-term vision, strategy, and team to continue delivering happiness and drive sustainable growth.”

Zoom counts Hong Kong’s wealthiest man Li Ka-shing as an early investor. Li’s Horizons Ventures, which manages his investments in technology start-ups, led a US$6.5 million Series B funding round for Zoom in 2013, as well as Zoom’s US$30 million Series C round two years later.

Li’s stake in Zoom was worth about US$2.6 billion, based on the video-conferencing company’s closing price in New York on Thursday and the most recent regulatory filing of his holdings.

Zoom has faced increased scrutiny over its reliance on developers in China and “mistakenly” routing some conference calls through China last year, raising privacy concerns.

In December, US prosecutors filed criminal charges against a former Zoom employee based in China, accusing the employee of censoring virtual meetings commemorating Beijing’s crackdown on the pro-democracy movement in Tiananmen Square in 1989. Zoom said at the time that it fired the employee for violating company policies and cooperated with US officials in the inquiry.

Following the Tiananmen commemoration incident, the company said it would not allow requests by the Chinese government “to impact anyone outside of mainland China” and stopped direct sales of its products in the mainland in August 2020, instead offering sales through local, third-party partners.

The company is also facing inquiries from US prosecutors in New York and California over its interactions with foreign governments and officials, including the Chinese government, as well as information about its storage of user data, its privacy policies and its actions related to the Tiananmen commemorations.

The heightened scrutiny also comes as a regulatory crackdown on the tech sector in China has unnerved investors and caused regulators in Washington DC to demand greater disclosure by Chinese companies about their structures and ties to Beijing.

This article appeared in the South China Morning Post print edition as: Zoom and Five9 call off planned US$14.7b merger