Zoom’s Acquisition of Five9 Is Scrapped

Zoom Video Communications Inc.’s ZM 1.59% nearly $15 billion bid to acquire contact center company Five9 Inc. FIVN -1.23% was shot down Thursday, dashing a major expansion plan for a video-conferencing powerhouse that has battled scrutiny over its perceived ties to China.

Five9 issued a news release saying that the deal failed to gain enough votes from its shareholders and that the merger plan had been “terminated by mutual agreement” between the two companies.

“We had the opportunity to engage extensively with our shareholders since our transaction announcement,” Five9 chief executive Rowan Trollope said in the statement. The company said it would continue its current relationship with Zoom, which includes contact center services.

Eric Yuan, chief executive at Zoom, said in a statement that while the company had looked forward to the potential partnership, “financial discipline is foundational to our strategy.” He said Zoom remains focused on increasing value for shareholders and customers.

Zoom’s stock remained flat after the news at roughly $262 a share. Five9 shares decreased more than 1% in after-hours trading.

The rejected bid comes after proxy advisory firm Institutional Shareholder Services recommended Five9 shareholders vote against the acquisition, highlighting concerns about Zoom’s slowing growth as many people go back to more in-person meetings. Glass, Lewis & Co., another proxy advisory firm, also advised Five9 shareholders to vote against the deal over similar concerns.

The deal also drew scrutiny from U.S. regulators over national security concerns. The Wall Street Journal reported last week that a Justice Department-led committee was investigating the planned merger over Zoom’s ties with China. In a letter posted on the Federal Communications Commission website, the Justice Department said there could be risk posed by “the foreign relationships and ownership.”

Zoom said it still expected to get all the approvals it needed by the middle of next year.

The company has been one of the biggest beneficiaries from the shift to remote work and distance schooling. The value of the company’s shares shot up after widespread lockdowns took hold in the U.S. and around the world last year. It was leveraging its strong share price to acquire Five9 in the all-stock deal.

The blocked deal is a blow to Zoom’s growth plans. After becoming one of the biggest breakout hits during the pandemic as the dominant video-conferencing platform, the company faces a more uncertain future. In its most recently reported earnings, in August, Zoom’s sales guidance came in lower than expected as small businesses and consumers are expected to spend less on Zoom. Zoom shares have fallen nearly 30% since it announced the planned acquisition of Five9.

In trying to buy Five9, Zoom was attempting to break into the emerging market of cloud-based contact-center software, which helps businesses keep in touch with their customers.

Questions around Zoom’s links to China have come to the fore during the pandemic as the service became a lifeline for many under lockdown orders. Many of Zoom’s engineers have historically been based in China, and last year security researchers caught the company storing encryption keys—long strings of numbers and characters that can be used to access encoded communications—on servers in the country. The company has said that was a mistake and promised it wouldn’t happen again.

U.S. prosecutors also have accused Zoom of improperly working with the Chinese government. In December, federal prosecutors in Brooklyn, N.Y., charged a China-based executive at Zoom with conspiring to disrupt commemorations over Zoom of the deadly 1989 Chinese military assault on pro-democracy demonstrators in Beijing’s Tiananmen Square.

In response to the federal charge, Zoom said that it fully cooperated with U.S. authorities, undertook an internal review and terminated the employee for violating company policies. At the time, other employees had been placed on administrative leave while its investigation continued, the company said.

Rishi Jaluria, an analyst with RBC Capital Markets, said Zoom still has growth potential despite the abandoned deal.

“Hybrid work is here to stay and Zoom still has differentiated technology versus other vendors,” he said. “Zoom continues to move into being a broader enterprise communication and collaboration platform, as seen with the success of Zoom Phone. I think Zoom would have benefited from Five9, but I don’t think they desperately needed it.”

Write to Aaron Tilley at aaron.tilley@wsj.com and Sebastian Herrera at Sebastian.Herrera@wsj.com

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