The U.S. Justice Department is investigating a deal by Zoom Video Communications to buy customer-service software company Five9 due to national security risks posed by the videoconferencing firm’s ties with China. Both companies are headquartered in the United States. Team Telecom, an interagency committee of the Justice Department, is conducting a review of the license application that arose as a result of the Zoom-Five9 deal.
Five9 has authorization from the Federal Communications Commission (FCC) to act as a common carrier to connect domestic and overseas networks. The national security investigation by Team Telecom was triggered by an application to transfer this permission from Five9 to Zoom.
In a letter posted to the Federal Communication Commission website on Aug. 27, David Plotinskt, from the Department of Justice, asked Ms. Marlene H Dortch of the FCC to defer its action on the application until Team Telecom completes its review, essentially putting the deal between the two companies on hold.
“USDOJ believes that such risk may be raised by the foreign participation [including the foreign relationships and ownership] associated with the application, and a review by the Committee is necessary to assess and make an appropriate recommendation as to how the Commission should adjudicate this application,” the letter states.
Based in California, Zoom’s business exploded after the pandemic as companies began to rely on remote working processes. At one point, Zoom had 300-million active daily participants. However, this also shone a spotlight on the company and its potential ties with China.
Zoom founder, Eric Yuan, is a Chinese immigrant who is also an American citizen. According to the company’s regulatory filing for this year, its development team is “largely” based in China. In a 2020 interview with MSNBC, Democrat House Speaker Nancy Pelosi called Zoom a “Chinese entity.”
Last year. U.S. prosecutors charged a former Zoom executive, based in China, with disrupting video meetings that commemorated the 31st anniversary of the Tiananmen Square massacre upon the behest of Beijing.
Zoom claimed to have fired the employee and cooperated with American officials in the investigation.
The company is also facing inquiries from prosecutors in California and New York regarding its interactions with foreign government officials, including those from the Chinese regime. The company’s privacy policies and storage of user data are under scrutiny as well.
Zoom had announced its $14.7 billion deal with Five9 in July. The acquisition is expected to allow Zoom to diversify into more markets. If it passes through, Five9 would be the company’s first acquisition valued at over a billion dollars.
In an email to CNBC, a Zoom spokesperson said that the company expects the deal to be closed during the first half of next year. “We have made filings with the various applicable regulatory agencies, and these approval processes are proceeding as expected,” the spokesperson stated.
However, things might not go smoothly for Zoom, according to Richard Sofield, a former chair of Team Telecom. In an interview with the Wall Street Journal, Sofield said that once Team Telecom begins to review a company, they often tend to look at risks that are completely unrelated to the transaction.
Zoom also seems to be aware of the inherent risks involved in running Five9. The company’s last earnings report, published in August, mentions that Five9’s operations in Russia are one such risk.
“We will need to manage the international operations of Five9, including engineering personnel and operations in Russia, which may pose regulatory, economic and political risks as well as additional challenges if the relationship between Russia and the United States worsens significantly, or if either Russia or the United States imposes or implements new or augmented economic sanctions, supply chain restrictions or other restrictions on doing business,” the report states.
Meanwhile, advisory firm Institutional Shareholder Services (ISS) have told Five9 shareholders to reject Zoom’s acquisition bid due to growth concerns. Zoom shares had risen by nearly four times last year, riding on the opportunity provided by the pandemic. It has also announced improvements and expansions to its services in hopes that customers will continue relying on services even as the pandemic wears down and people start returning to offices.
Though ISS admitted that Zoom and Five9 combined could have access to a bigger market, it also warned about several negative sides to the deal. “The all-stock deal exposes Five9 shareholders to a more volatile stock whose growth prospects have become less compelling as society inches towards a post-pandemic environment,” the ISS said. Since the deal was announced, shares of Zoom have dipped by 20 percent while those of Five9 have fallen by five percent.