Company: Zendesk Inc. (ZEN)
Companies: Zendesk is a software development company that offers “Software as a Service” solutions for tracking, prioritizing and resolving customer support tickets across multiple channels. The company’s offerings include Zendesk Chat, live chat software for connecting with customers through websites, applications, and mobile devices; Zendesk Talk, a cloud-based call center software; Zendesk Guide, a knowledge base that helps improve customer self-service and support agent productivity; Zendesk Gather, community forum software that enables customer end users to connect and collaborate; Zendesk Sell, a customer relationship management (CRM) product solution for sales to improve productivity, processes and pipeline visibility; Zendesk Explore, which delivers analytics to businesses to measure and improve customer experience; Zendesk Sunshine, a CRM platform; Sunshine Conversations, a messaging platform solution; Zendesk Embeddables, which allow developers to embed experiences on the web and mobile applications; Zendesk APIs that allow users to create custom integrations and interact with Zendesk data; Zendesk apps, which enable companies to adapt the interfaces of Zendesk products and platform solutions and to optimize the workflow through plug-ins; and Zendesk Suite, an omnichannel offering that combines its solutions.
Market value: $ 11.6 billion ($ 96.88 per share)
Activist: Jana Partners
Percentage ownership: approx. 2.0%
Average cost: n / A
Comment from the activists: Jana Partners is a very experienced activist investor with great success in the information technology industry. Jana’s returns in this industry averaged 24.02% compared to 7.64% for the S&P 500 over the same period. Jana rarely sends public letters to boards. They are not activists for activism’s sake, they will only get involved if they believe they can either create significant shareholder value or stop shareholder value from deteriorating. In that case, they could potentially do both.
On November 30, 2021, Jana Partners sent a letter to Zendesk expressing their opposition to the company’s acquisition of Momentive.
The first thing Jana can do to create value for shareholders is lead the fight against the Zendesk and Momentive merger. Jana makes several good arguments why this transaction should not materialize, including: (i) the company makes its largest acquisition to date on a premium valuation using undervalued equity; (ii) it contradicts the company’s successful historical strategic direction and direction; (iii) Zendesk has already had execution issues with its current business; and (iv) it makes Zendesk much less attractive to a potential acquirer of its business.
But you don’t have to take Jana at her word – the market was talking loudly. Since the transaction was announced, Zendesk’s stock has fallen nearly 20% and Momentive has fallen roughly 25% as of December 3rd in an otherwise flat market. Additionally, Momentive shareholders aren’t too happy with it either – activist investor and Momentive shareholder Legion Partners were quick to speak out against the deal. This deal is so bad that it could potentially be one of the few mergers in history to be rejected by either side. The completion of this transaction alone should create tremendous value for shareholders.
Once that happens Jana can bring an experienced and fresh perspective to the board of directors second to creating shareholder value as she has done in many other companies. Given the company’s execution issues and this recent misstep, the board and management could certainly benefit from a stronger shareholder focus. As Jana in most of her active engagements and as indicated in her letter, you work with a team of public company directors and executives with relevant industry experience who would likely make excellent board members. The company’s CEO, Mikkel Svane, is also the founder, and he’s clearly brilliant, but he may not be the best person to run the day-to-day running of a public company. In addition, the lead director Carl Bass is not a friend of activists: As CEO of Autodesk engaged by activists, he called them sports fans who think they know more than the coaches and owners. Less than a year later, he was no longer CEO of Autodesk. If he’s not careful, he can get a similar result here as he’s up for re-election in 2022.
The best the board of directors can do for itself is to promptly terminate the merger agreement in response to the will of the shareholders. If the agreement is instead terminated because shareholders vote against what it appears to be, history has shown that this will be great support for the activist and against management and will allow the activist to join the board at the next annual meeting step if you choose to do so. In addition, there were already signs of shareholder dissatisfaction at last year’s AGM – Hilarie Koplow-McAdams and Michelle Wilson, two of the three elected directors, received 40.04% and 37.43% of the votes against, respectively.
This situation would lead to the third value creation opportunity – a sale of the company to a strategic one. When Salesforce board member Colin Powell’s email was hacked in 2016, it was revealed that Zendesk was on Salesforce’s M&A target list, but the Zendesk CEO was not interested in the sale. Private equity has also shown interest without having to show it. Well, an involved activist generally puts a company in a pseudo-game, and a board of directors who is on the verge of losing a proxy battle suddenly gets an incentive to sell the company if they believe in one way or another to fail.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.