Zendesk declines unsolicited takeover bid as full year revenues rise 30%

Zendesk has rejected an unsolicited takeover bid by an unnamed private equity firm that it says “significantly undervalues” the company as a key vote to approve its near $4 billion takeover of Momentive Global draws nearer.

The firm declines to comment further on the bid, but CEO Mikkel Svane confirmed yesterday :

With the assistance of independent legal and financial advisers, our Board thoroughly reviewed the proposal and concluded that the offer significantly undervalues the company and is not in the best interest of our shareholders.

Zendesk has come under pressure from activist investors Jana Partners and Janus Henderson to drop its planned acquisition of Momentive Global, parent company of SurveyMonkey. But Svane doubled down on the proposed takeover, saying:

Zendesk powers billions of customer interactions every day. With Momentive, we can turn that into something much more powerful for our customers, real customer intelligence that will help redefine how to strategically run a business. And that is a future that we are ridiculously excited about. We feel strongly about this opportunity and the plan that we have in place to make it a reality and we hope our investors do as well. We are going to build a business with a $5 billion run rate by '25 with improved margins and a stronger growth rate. And we believe that is in everybody's best interest.

Revenue growth

For its part, Zendesk just turned in its Q4 and full year numbers. Revenue for the quarter rose 32% year-on-year to $375.4 million with a net loss of $61.8 million, while full year revenue was up 30% year-on-year to $1.339 billion and a net loss of $223.6 million.

Other stats of note from the earnings release:

• Customers generating more than $250,000 in revenue now account for 38% of the company’s annual recurring revenue, up from 32% at the end of 2020.
• Zendesk Suite accounts for $500 million of Annual Recurring Revenue (ARR), 35% of the total.
• Over 90% of bookings from new customers were on Suite
• Suite accounted for nearly 60% of total bookings during Q4.

On the rise in larger enterprise adoption, Svane said:

We see a bunch of industries where you see the established enterprises are trying to keep up with the challenge of the disruptors. That is very visible here in a digital-first economy, and that definitely boosts interest in Zendesk….in many industries, we are kind of considered the 'disruptors' choice'. I think what we're also seeing is that there is a trend which we spent most of 2020 and beginning of '21 on - it's just like simplifying the usage of our Suite, so that it not only has everything together, but it's also like elegantly integrated. So you can roll it out elegantly without a lot of overhead and very, very quickly. And we believe that's a major IT trend that we see in the enterprise today. 

He added:

The biggest trend we are seeing is enterprises being attracted more to easier, yet powerful, solutions that they can roll out really, really quickly; that they can scale with really, really quickly; that are very, very agile; that don't take years to change; that are very responsive to their needs and to their customers needs; that provide this transparency and empowerment of everybody involved; and where it's almost at a point where they don't have to think about it as an IT solution, but truly live up to kind of the promise of SaaS. We're very excited about it. I think this is one of the mega-trends coming out of the coming out of the pandemic, and that's a major driver of our business right now.

Customer conversations overall are evolving in the Vaccine Economy, he argued:

I wouldn't describe us as a company that saw a big like pull in during the pandemic…We had a lot of customers in the sharing economy, in the transportation industry, in the entertainment industry and travel and so on, that were highly impacted by COVID. What we did during that transition was to focus on our customers and kind of help them as much as we could for the long-term relationship. We also got calls from a lot of customers that saw a tremendous amount of demand…Some of our customers, within a couple of quarters, suddenly had a 50 million more customers to serve. So we definitely saw a lot with our customers.

But we think much more about the long-term implications through demand in the market. That goes both for digital engagement going forward, but especially around the enterprise buying IT going forward, which is much more focused on agility, fast time to results and keeping up with customer expectations. We believe these are not like short-term COVID blips. These are 2 long-term mega-trends.

My take

We are very, very focused on the upcoming transaction here and getting the vote.

It’s going to be interesting few weeks for Zendesk as the run up to the vote for approval of the Momentive takeover approaches. While Suite is shaping up to be a big success and the Zendesk revenue growth rates remain encouraging overall, the deal is a major plank in Svane’s stated ambition for the company to become a $5 billion run rate firm by 2025.

The firm has produced a strategic rationale document for shareholders that makes a strong case for the deal to go ahead and makes for interesting reading. Svane observed:

We really appreciate our investors digging in and engaging in these conversations. And like that's going to continue over the next couple of weeks. We realized that we surprised some of our investors with this acquisition. So giving them time to dig in and understand it better and really engaging with us in these conversations, it's been very rewarding, and we believe it's very productive, and we believe that's going to continue over the next couple of weeks.

But what happens if the deal is rejected by investors? What’s Plan B? Svane argued yesterday:

We have a strong operating plan for '22 and we're going to continue to execute on that, that's for certain. And if, for one reason or the other, the deal doesn't go through, we're going to continue to execute on our vision about building customer intelligence. But the path is going to be different and we'll have to kind of revisit some of our strategies there. But we're very, very committed to our vision. We believe we can build strong, strong shareholder value with that, and we believe that the Momentive acquisition fits very, very neatly into that.

Watch this space.