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Zoom Is a Verb—and a Target

Zoom is way too small to be considered “big tech,” but the videoconferencing superstar is now facing some of the challenges better-associated with its much larger tech peers—without their advantages.

The company known formally as

Zoom Video Communications,


ZM -0.87%

which became a household name with the pandemic, is now struggling with its next act. Its proposed acquisition of Five9 is facing opposition from some of the latter’s shareholders, who are unhappy with the deal’s price. And The Wall Street Journal reported Tuesday that the Justice Department is now investigating the deal over potential national security risks given Zoom’s operations in China. The department has asked the Federal Communications Commission to defer action on the

Five9


FIVN -0.83%

acquisition while it undertakes its review.

This will put Zoom’s most aggressive expansion effort to date on hold. Five9 shareholders are due to vote on the deal on Sept. 30, but the influential proxy advisory firm Institutional Shareholder Services issued a report last week recommending against the all-stock transaction. Zoom also has lost nearly one-quarter of its market value since announcing the deal on July 18—though most of the drop came after the company’s fiscal second-quarter report in late August. The decline hasn’t only erased the 13% premium the deal offered to Five9’s shareholders but would mean that they would be opting for a 10% discount to the current share price at the agreed ratio.

If the deal survives enhanced scrutiny, Zoom will definitely need to sweeten the pot. Raising the ratio is obvious, though the volatile nature of Zoom’s stock price in the post-pandemic world could make that less attractive to Five9 holders. Zoom also has about $5.1 billion in cash on its balance sheet with no debt. But too much of a raise could make its own shareholders revolt—especially since the background details filed with Five9’s proxy make it clear no other serious bidders were after the company.

Zoom’s bigger challenge will be how to scale up its business under both watchful regulators and deep-pocketed, better-connected competitors. The company is nowhere near the size of giants like

Apple,

Amazon,

Google and

Facebook

; Zoom’s $3.6 billion in trailing 12-month revenue would rank it around 415th on the S&P 500. But the pandemic also made Zoom the default name for videoconferencing, with KeyBanc Capital Markets estimating the company’s market share in the quarter ended April to be around 83%. As that data is based on credit card receipts, it doesn’t reflect Zoom’s larger corporate business. But the company is also a major competitor on that front to services offered by

Microsoft

and Google, which generate more than $50 billion a year each in free cash flow compared with Zoom’s current level around $1.7 billion.

And despite the company’s efforts to build new business-focused services like Zoom Phone, acquisitions like Five9 will likely be a key part of Zoom’s future expansion plans. These could prove especially important as the company works to reduce its reliance on the more volatile consumer market, which is naturally slowing with the return of travel and more-normal versions of socializing and dating. Despite its relatively small size, though, Zoom may be hobbled by the impression that it is ubiquitous.

Being a verb really isn’t always what it is cracked up to be.

Write to Dan Gallagher at dan.gallagher@wsj.com

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