From WFH boom to RTO bust. Could a Zoom takeover be next?

By | September 6, 2022
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New York (CNN Business) – The work-from-home boom may be over, and that’s not good news for one pandemic stock market darling.

Zoom’s weak earnings outlook and plunging stock price raise the question of whether or not the video conferencing company is a one-trick pony that needs to be part of a larger tech firm.

It may have trouble finding a suitor, though. Competition is fierce in the video conferencing business, which means that there aren’t any obvious buyers. And analysts say Zoom is still pretty pricey, even after the big stock drop.

Zoom has to contend with several larger tech giants that already have similar products and presumably would not need or want Zoom’s technology or customer base. Microsoft (MSFT) operates Teams and Skype. Cisco (CSCO) has WebEx, which Zoom CEO Eric Yuan helped build. Google owner Alphabet (GOOGL) runs Meet and Chat.

Apple (AAPL) likely wouldn’t make sense as a Zoom buyer either. The company already has the ubiquitous FaceTime video chat platform for its iPhones, iPads and Macs. And Apple did a deal in 2020 for a startup called Spaces that helps augment video conferencing technology with virtual reality avatars.

But what about other tech firms that still might want a bigger presence in video? Could Zoom be a fit for Meta Platforms (FB)? The Facebook/Instagram/Messenger/WhatsApp owner could potentially get a further boost to its video aspirations by adding Zoom.

How about Salesforce (CRM)? There’s an argument to be made to combine Zoom with Slack, which Salesforce agreed to buy in 2020 for nearly $28 billion, to create an uber-workplace productivity app that could compete even more effectively with Microsoft’s Teams.

The major obstacle to any deal could be Zoom’s price.

Zoom could go private
Joseph Bonner of Argus noted that although Zoom shares are well off their pandemic peaks, the company still would be tough to swallow — even for a megacap tech with tons of cash.

“A Zoom acquisition is unlikely due to a number of factors,” Bonner said in an email. “The thesis in favor of acquisition would be to pick up the asset on the cheap since it’s lost so much value in the past year. Still at a $24 billion market cap, it’s not that cheap and an acquisition premium would push that toward $30 billion or more.”

Bonner thinks that price tag would likely scare off any big tech buyers, as would the possibility of any potential deal getting a tough review from regulators in Washington. However, Bonner said there’s a chance that Zoom could be bought by an investment firm so that it would no longer be subject to the quarterly earnings report whims of Wall Street.

“Think private equity. That could be a possibility,” Bonner said.

Others point out that Zoom is hardly the only tech/software company that is dealing with a post-Covid hangover. The Nasdaq has plummeted due to worries about rising interest rates and recession fears as well.

“I don’t think it’s accurate to say Zoom is uniquely struggling right now,” said Morningstar analyst Dan Romanoff in an email. “All of software has been battered over the last 10 months.”

Romanoff added that Zoom is “an innovative company with a great product.” The problem, he said, is that at the height of the pandemic, Zoom was “generating an unsustainable revenue trajectory” and the stock was “sharply overvalued.”

That said, a deal could be possible. Romanoff noted that a Slack-Zoom combination could make sense.
“I thought a couple years ago that Slack and Zoom should merge because there is no need for standalone video, phone, and messaging products,” Romanoff said.

But he’s not sure Salesforce would want to buy Zoom after already paying up for Slack, noting that Salesforce has “maintained that [it is] not looking to do further large deals at this time.”

Another possible suitor
There is one other possible wild card though: Business software company Oracle.

“Oracle doesn’t have anything like this in their portfolio and they have been serial acquirers over the years,” Romanoff said. But he still thinks an Oracle (ORCL) deal for Zoom is highly unlikely because he’s “not sure that their balance sheet would allow them to do such a deal or that they are in the market at all.”

Romanoff added that if any tech company wanted to make a bigger bet on video, a cheaper way to do so would be with communications software firm RingCentral (RNG), which has a market value of just a little more than $4 billion.
Zoom could also look to go back out and make a deal of its own if market conditions improve. That could help the company diversify.

“I am in the camp that Zoom is more likely to be an acquirer than an acquiree at this point,” said James Fish, an analyst with Piper Sandler.

Zoom had actually hoped to make a big purchase recently when it agreed to buy cloud call contact software firm Five9 (FIVN) in July 2021. But Zoom called off the deal just two months later, and CEO Yuan said that “financial discipline is foundational to our strategy.”

 



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