The Zendesk ownership saga took several new turns this week, with an external investor, Jana Partners, agitating against the company, a review of its strategic options coming to a close, and the business software company deciding to stay independent.
Now worth less than $10 billion, Zendesk has made more noise in recent months than you would expect from a company of its size. But after announcing that it would buy Momentive (SurveyMonkey) for more than $4 billion last year, Zendesk has been in a bruising fight with external investors that has proven to be recurring headline fodder.
Even though Jana wasn’t terribly enamored with the SurveyMonkey deal (to put it mildly), Zendesk believed it was a way to drive revenue growth and push the company from purely help desk-related tasks – and, to a smaller degree, customer relationship management, or CRM – into the customer experience market. Zendesk suggested in an investor presentation that the deal could help it grow revenue from around $1.39 billion, the run rate it was at in November 2021, to $3.5 billion by 2024, which Zendesk emphasized was ahead of schedule.
Whatever Zendesk was selling regarding Momentive, however, Jana wasn’t buying, and the tenor of the conversation between the company and its shareholder has only become more strained over time. Zendesk has done its own thing, ignoring Jana’s increasingly stringent demands outlined in letters to the company and in public statements. That includes this week’s threat of a lawsuit if Zendesk failed to call a stockholder meeting immediately.
Jana wants Zendesk to sell. Earlier this year, Zendesk turned down a $17 billion offer to sell the company, which, as we wrote at the time, “angered” Jana. The offer came from a consortium of private equity firms, and it is easy to imagine why founder and CEO Mikkel Svane, who built Zendesk from scratch, did not want to take that route. Emotion aside, an analysis by TechCrunch at the time concluded that the deal undervalued the company.
That Zendesk wound up in a sale process of sorts should not surprise. We’ve seen some big enterprise deals in the last couple of years, including Broadcom’s recent announcement to buy VMware for $61 billion, which is still under a go-shop provision and subject to regulatory scrutiny. Prior to that, some big software deals that closed include Salesforce buying Slack for almost $28 billion, Oracle buying Cerner for the same price, and Microsoft buying Nuance Communications for $19 billion
It’s worth noting that the above deals happened in a different economic environment. Whether it’s warranted, markets have retreated and VC dollars are getting tighter. Valuations are down all around. As such, it would make sense that even if Zendesk wanted to sell itself, now may not be a particularly good time to do it.
The company agrees. Zendesk had a chance to take the money and run, but it believed it was actually worth more than the offer — at least at the time. Does the spurned $17 billion offer from earlier this year appear more attractive in light of continued declines in the value of technology companies? Sure, but enough to put the decision to decline in doubt? Let’s find out.
Zendesk declines to sell
Earlier this week, Jana announced that it intended to sue the company for “failure to set a date for its 2022 annual meeting” and commented on a CNBC report that Zendesk’s review of its options was “unlikely to result in a transaction.”
That report was correct. Zendesk went ahead and set an August 17 date for its annual meeting and confirmed that it isn’t selling. Per the company:
Zendesk today announced that its Board of Directors has conducted and completed a comprehensive review of strategic alternatives aimed at enhancing stockholder value. After a thorough process [ … ] which included soliciting interest from a wide range of potential strategic partners and financial sponsors regarding a potential sale of the Company, the Board has unanimously determined that continuing to execute on the Company’s strategic plan as an independent, public company is in the best interest of the Company and its stockholders at this time.
In response to that hard no regarding selling the company, investors checked out of its stock, sending it to fresh 52-week lows. By Friday trading, Zendesk’s value fell to around $65 per share from around $91 per share at the start of the week. Both numbers are far under the company’s 52-week high of $153.43. And Zendesk is today worth far less than the roughly $90 per share that it was valued at ahead of COVID-19.
The figures are all over the board. So let’s pause and try to sort out what Zendesk is actually worth.
What’s Zendesk worth?
Zendesk reported its Q1 results back in April. The data included revenues of $388.3 million, up 30% from the year-ago period, another quarter of 120% or greater net expansion and long-term remaining performance obligation (RPOs) growth of 38%. The company’s work to sell its products as a suite was also reported to be bearing fruit.
The company expects revenues of $1.685 billion to $1.710 billion (growth of 25.8% to 27.7%) in 2022. That’s a pretty hefty chunk of revenue growth for a public company and with gross margins now above the 80% mark, Zendesk is kicking off the sort of software top line that investors have long coveted. So why is its stock price in the toilet?
On Friday morning, Zendesk was valued at around $8 billion or around 4.8x its expected revenues for this year. At that price, is the company cheap or expensive? The former, it appears.
Bessemer data indicates that the first and second quartiles of SaaS growth land have forward-growth rates of 24.4% to 32.2%. Zendesk splits that difference. Those two cohorts have forward multiples of 6.1x (second quartile) and 8.4x (top quartile). As Zendesk sits between the two, we can infer a 7.25x multiple as reasonable for its value. Where does that value the company given its 2022 forecasted revenue growth? Between $12.2 billion and $12.4 billion.
Those are irksome numbers — they at once indicate that the company’s stock may be oversold compared to its peers and that the price that Zendesk could have commanded earlier this year was more attractive than it appeared at the time, when the value of software revenues was significantly higher.
That Zendesk won’t sell now actually fits with its prior actions: It was not willing to sell for $17 billion earlier in the year — why would it be willing to sell for a smaller sum now? Especially because the company is forecasting between $175 million and $190 million in free cash flow this year, it doesn’t have to do squat to keep operating and, perhaps, wait out the market trough in software valuations — if that is what the present-day downturn winds up becoming.
Losing more than a fourth of its value in a week after shedding huge amounts of market cap in preceding months must make for a bracing operating climate at Zendesk. But it appears ready to stay the course. Let’s see if its wager on itself pays off.