Takeover bid, the latest drama to hit Zendesk
As a closely watched corporate story, the Failed takeover bid of customer service software company Zendesk by a private equity consortium on Wednesday may pale in comparison to what the company faces later this month: a controversial proxy vote over its planned merger with owner SurveyMonkey , MomentiveGlobal.
The shareholders of Zendesk and Momentive are scheduled to vote Feb. 25 on whether to approve the merger of the two companies in a deal that, when announced last year, was valued at around $4.1 billion.
Since the agreement has been approved by Zendesk’s board in October, activist shareholder Barry Rosenstein of Jana Partners called it a knee-jerk, ill-considered move that, at best, will add 1% revenue growth to the company at a cost of $22 per share, down from $28 when the deal was announced.
The Case, Rosenstein said in a letter to Zendesk shareholders last week, “lacks financial and strategic merit, introduces substantial execution risk, and relies on highly questionable synergy and multiple pro forma trading assumptions.”
Rosenstein called the deal impulsive because it appeared to be prompted by Momentive advisers reaching out to company management as part of an extensive bidding process rather than something Zendesk was looking for.
“Zendesk says the acquisition was part of its strategy, but as the power of attorney reveals, Zendesk has done absolutely nothing proactive about it in the previous two years,” he said.
Additionally, Rosenstein said, the merger would be Zendesk’s largest by far, creating integration issues he says the company is not prepared for; Zendesk’s CFO and nearly two dozen finance and accounting employees left the company months before the deal was announced.
“They have an entirely new, unproven finance team,” he said.
The company brought on board Shelagh Glaser, a 30-year Intel finance veteran, was named chief financial officer in May last year, replacing Elena Gomez, who had been chief financial officer since 2016 before leaving to become chief financial officer of Toast, the fintech of the restaurant industry.
The consortium of private equity firms that sought to take over Zendesk this week made a cash offer worth $127 to $132 per share, or about $16.2 billion. Apparently, the group did not condition the offer on a shareholder vote later this month.
“The proposal is not conditional on the termination of Zendesk’s pending acquisition of Momentive,” Zendesk said in a statement.
Zendesk’s board said it rejected the offer, saying it significantly undervalued the company. The board said elsewhere that the company was capable of hitting $176 per share, about 40% more than what was being offered.
“In accordance with its fiduciary duties, after careful consideration and consideration in consultation with its independent financial and legal advisors, the Board has concluded that this non-binding proposal materially undervalues the Company and is not in the best interest of company and its shareholders,” said Zendesk.
The private equity firms making up the consortium have not been identified but Wall Street Journal report says it includes Hellman & Friedman, Advent International and Permira. Thoma Bravo would also be interested.
Data Breach Cases
The merger drama is not a first for Zendersk, which launched in 2007 and became an IPO success story in 2014, even though the market was volatile at the time and the company was warned not to continue.
“It was a sea of red on [Wall] Street,” said Alan Black, chief financial officer during the IPO and now founder of Surfspray Capital. “The principal banker…asked me if I had a plan B. As you can imagine, those weren’t words I was happy to hear.”
Shares of the company then soared 44%, giving investors and analysts an early indication of how much strength cloud-based tech companies could gain in public markets.
But he was hit with a class action lawsuit a few years later; In 2019, the company learned that some of its accounts had been hacked by a hacker who gained access to its cloud keys through a third-party provider.
A union pension fund that has been the lead plaintiff in the lawsuit says the company, its then-CEO and its chief financial officer misled investors by reporting performance figures during the period without considering the impact of the breach and other matters.
“Zendesk’s business metrics and financial outlook were not as strong as represented during the Class Period,” A declaration by the law firm Rosen, said one of the plaintiffs’ lawyers. “As a result, Zendesk’s public statements were materially false and misleading at all relevant times.”
The lawsuit was dismissed last year. Plaintiffs could not cite a single statement that was false or misleading or that the company and its two executives attempted to mislead.
The allegations, U.S. District Judge Charles Breyer said in his decisionsupport the inference that “Zendesk was simply unaware of its errors or their consequences – a more ‘convincing’ inference than the convoluted fraudulent scheme the Pension Fund attempted to allege.”
Whether Zendesk will walk away from the next proxy battle with an equally positive outcome remains to be seen, but it is a company that has become familiar with high-level struggles.