Zendesk has been having some issues with its investors lately.
Last month, it turned down a $17 billion takeover offer from a consortium of private equity investors, saying the deal undervalued the company. Later in the month, unhappy investors rejected the company’s $4.1 billion acquisition offer for the parent company of SurveyMonkey, Momentive.
That’s a lot of turbulence for any company to be dealing with in such a short time, but yesterday, activist investor Jana Partners, which owns 2.5% of the company’s stock, piled on with an SEC filing that wasn’t terribly friendly.
In a no-holds-barred filing, the firm put Zendesk management on notice that it wasn’t pleased at all, and said it was nominating four candidates for election to Zendesk’s board of directors at the company’s 2022 shareholder meeting.
“We believe the Zendesk Board of Directors’ (the “Board”) misguided attempt to acquire Momentive Global Inc. (“Momentive”) exposed the Board’s blatant disregard for stockholders and ongoing failures of oversight. Absent meaningful change to the Board, we believe Zendesk will fail to achieve its potential and suffer a persistent valuation discount – with stockholders left paying the price,” Jana wrote in the filing.
Jana’s filing comes after a slew of public letters and a presentation in which it questioned the Momentive deal and urged Zendesk management to cancel the acquisition.
At the time of the $17 billion takeover offer, we ran an analysis of Zendesk’s financials. Momentive, in spite of investor objections, would have sped up growth, but even without it, the company was on track to do just fine, so much so that $17 billion seemed like a low-ball offer.
Our argument was simple: The offer to buy the company was worth a somewhat-slim 30% premium on its market value, and with accelerating revenue growth in recent quarters, Zendesk had a credible growth story under its belt.
Growth is valuable, and it isn’t hard to see why insiders would not want to sell the company’s future for such a slim markup, especially as private equity deals often lever purchased assets to enrich new ownership, making future business results harder to achieve from under the weight of fresh debt.
While Jana is clearly not happy with the state of play, the real question here is, are they simply upset that management turned down the acquisition offer, or that it wanted to go through with Momentive deal? And, is there a disconnect here between Jana’s perspective and the financial realities of Zendesk?
Should Zendesk sell?
Putting invective aside, the Jana filing included an argument worth sharing: “We believe the Board has shown a reckless disregard for stockholder capital […] as well as a history of refusing to engage with interested strategic and financial buyers for the Company.”
You could argue that Zendesk should have taken the $17 billion deal. Certainly, that figure is billions of dollars greater than the $14.1 billion valuation that Zendesk enjoys today on the public markets (Yahoo Finance data).
You could also posit that $17 billion was too low. But one could also contend that, yes, despite the price being too low, the company would still be better off selling itself, at least from an investor-value perspective.
Zendesk’s management doesn’t appear to agree, which we can infer from its recent efforts to be an acquirer instead of an acquisition target, not to mention the fact that it turned down a $17 billion offer. Our read, then, is that Jana wants to get its candidates on the board, find a price that can work for everyone, and try to make a sale happen.
If that does happen, it could be a motivator for startups looking to avoid similar fights in their futures by instituting dual, or even three-class shares (more here).
Such a capital setup allows insiders to wield more control over a company, and fend off external pressure; the other side of that coin is that leaving all control in founders’ hands can lead to what’s going on with Meta today. So there is no one way to make corporate governance work in all cases, as there is a tradeoff between insider control and external agitation. But there is a way to dampen the latter by boosting voting control amongst the existing executive team.
Recall that the Zendesk dustup is not the only time we’ve seen a former startup darling go public only to run into activist investor pressure. Box recently went through a similar saga, coming out on the other side with accelerating growth and control maintained in the hands of its long-time CEO Aaron Levie.
Whether or not Zendesk should sell is effectively a pricing question. If someone offered $100 billion for the company, any leadership would be insane to not accept it, and would in fact have to give in to its fiduciary responsibility to shareholders to pull the trigger.
The tension between external and internal parties likely comes from precisely how much the company will be worth in the future, and whether or not there is a price that a larger company will pay that Jana and others like, and the company’s current leaders will accept. The more optimistic the current Zendesk management is, the harder it will be to find that price.
So, it’s simpler for Jana to just get its candidates on Zendesk’s board, and push through what it wants. Corporate battle! It’s never boring, at least not for those of us on the outside observing the machinations.
It’s worth noting that Zendesk stock is up almost 1% as of Noon ET today.