The price of Zendesk stock is surging nearly 28% so far this morning in early stock trading action following news that the company has agreed to a proposal to be acquired by a group of investors led by Permira and Hellman & Friedman in an all-cash transaction.
According to the press release published this morning, Zendesk has been valued at $10.2 billion or $77.5 per share resulting in a 34% premium based on ZEN’s closing price yesterday. The Abu Dhabi Investment Authority will also be taking part in the deal according to the document.
The acquisition comes after a rocky year for Zendesk amid the failed acquisition of Momentive Global, the parent company of the popular online survey service SurveyMonkey.
Back on February 25, shareholders of Zendesk went against the all-stock merger agreement. The most prominent opponents of the deal included activist hedge fund Jana Partners and proxy advisory firm Institutional Shareholders Services.
Just days before that event, the company had rejected a takeover proposal from a private equity consortium that valued the firm at approximately $16 billion. The Board of Directors concluded back then that the bid significantly undervalued Zendesk’s business.
As of yesterday, Zendesk stock accumulated a 44.4% loss since 2022 started with its market capitalization standing at around $7.2 billion as of yesterday.
Zendesk Acquisition Is Good News Considering Recent Strategic Update
On 9 June, Zendesk released a document in which it discussed the merits of an acquisition from a third party that could help the management in properly executing its strategic plan to keep growing the business.
A total of 26 different counterparties including 10 sponsors and 16 strategic partners were reached and all of their proposals were analyzed by the Board of Directors to select the best(s) candidates.
In regards to this approach, the company stated: “our Board unanimously determined that the right path to sustainably grow stockholder value lies in advancing Zendesk as an independent business”.
The failed acquisition of Momentive may have catalyzed this move from Zendesk’s board as it was a clear sign for the management that they did not count on the support of various key shareholders in the pursuit of their goals.
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However, Zendesk noted that none of the parties it reached out to submitted an “actionable proposal” due to “adverse market conditions and financial difficulties”.
Zendesk stock slid 14% on the day that this business update was published as investors’ hope of a deal with a third party cratered. Therefore, today’s acquisition announcement is positive news as senior management has finally put an end to months of corporate drama.
Zendesk counted on the assistance of Goldman Sachs and Qatalyst Partners for all finance-related matters and from Wachtell, Lipton, Rosen & Katz for all the legal considerations concerning the deals.
What Does Zendesk Situation Say About the Tech Industry?
Zendesk’s struggles to secure a financial sponsor who may take the company private or acquire a sizable stake highlights how difficult things are for tech businesses to find financing following a shift in macroeconomic conditions in the United States.
This explains why tech stocks as a whole have been experiencing such a pronounced downturn since November last year as market participants expected that the Federal Reserve will start tightening its monetary policy in response to elevated inflation readings.
Zendesk can be considered a poster child for tech companies with weak business models and relatively poor financial performance. For example, even though the firm has managed to more than triple its sales in the past 4 years, it has not been able to swing to GAAP profitability during that same period.
However, the company has managed to stay cash-flow positive during that same period as share-based compensation – a non-cash item – is what makes the firm unprofitable from an accounting perspective.
In addition, the company managed to amass some debt as its long-term commitments stood at $980 million by the end of the previous quarter on total assets of $2.45 billion. However, its liquid reserves cover this entire amount and that may have sweetened the deal for these investors.
All things considered, if a company like Zendesk, whose financials and business fundamentals are decent to say the least, struggled to find financial sponsors while they were willing to pay only a fraction of what the business was a couple of months ago, things will not be easy for tech firms with weak fundamentals, large cash burns, and poor value propositions or business models to showcase.
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