• Zendesk announced after market close on Thursday that it was buying Momentive for around $ 4 billion worth of shares.
  • That price would be equivalent to almost a third of Zendesk’s market cap.
  • Analysts lowered their rating on Zendesk after the deal, and the stock fell 23%.

Zendesk shares fell 23% on Friday after the customer service software developer agreed to spend nearly a third of its market cap on the purchase of Momentive Global, formerly known as SurveyMonkey. Momentive shares fell 9%.

Analysts have lowered their ratings and pricing targets on Zendesk due to the high dilution and the risk of spending so much on a company that grows slower than the acquirer. Zendesk’s revenue is expected to grow nearly 30% this year, while Momentive is expected to grow just under 20%.

Zendesk said it will pay 0.225 share for each Momentive share, or about $ 28 per share, based on Zendesk’s 15-day average through October 26. At Thursday’s closing price, that’s just over $ 4.1 billion, although that has already fallen with Friday’s stock price drop.

The companies said they plan to complete the acquisition in the first half of next year. Zendesk said the deal is expected to “drive growth” by 2023 and that it will accelerate its plan to reach $ 3.5 billion in revenue within a year.

Zendesk faces a swarm of competition with its core customer service products and in the sales and marketing software markets. Rivals include Salesforce and ServiceNow in the high end and Freshworks, Kustomer, Zoho and Monday.com in the midrange and with some of its other services.

By acquiring Momentive, Zendesk instantly takes on a company with over $ 100 million in quarterly revenue that is best known for its survey software. The company switched from SurveyMonkey to Momentive in June, to signify its expansion into other areas, such as providing market and brand analysis to customers. Qualtrics, one of Momentive’s main competitors, parted ways with SAP in January and is now valued at around $ 24 billion.

“The combination of Momentive may provide some synergy in the market over time” for Zendesk, analysts at B of A Securities wrote in a report released Friday. “However, we are skeptical, given SurveyMonkey’s vastly reduced market presence compared to Zendesk, which is gaining a foothold in the business. In addition, Momentive’s 20% growth rate is good. less than Zendesk’s 30% and more. “

B of A downgraded its rating to neutral from buy and lowered its price target to $ 120 from $ 185. Zendesk was trading at just over $ 100 on Friday. Piper Sandler lowered her buy recommendation to neutral and lowered her price target to $ 122 from $ 175, citing “short-term integration risks and potential shareholder dilution.”

Zendesk was already significantly underperforming its peers for the year preceding the announced acquisition. The stock was down 17% in 2021, as of Thursday’s close, while the Nasdaq was up 60% and the WisdomTree Cloud Computing ETF, which tracks a basket of cloud stocks, was up 16%. %.

At the end of July, Zendesk missed earnings and adjusted revenue estimates for the first time since its IPO in 2014. It was a period of transition for Zendesk as the company worked to move upmarket and deals took longer. time to conclude, JMP Securities wrote in a note to clients after the report.

As investors sell off Zendesk and Momentive, there is a growing chance that the deal will not be approved, as it requires a vote from the shareholders of both companies.

Last month, Zoom and Five9 abandoned their previously agreed $ 14.7 billion deal, after Five9 shareholders rejected it. The purchase price was a small premium at the time for Five9, and this deteriorated further as the Zoom stock price fell.

Likewise, the decline in the value of the Zendesk-Momentive transaction “is likely to introduce uncertainty into the transaction, which is put to a shareholder vote, and a large surplus for Zendesk shares,” analysts wrote. by B of A.

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