Is Zendesk Still a Buy After Announcing the Acquisition of Momentive Global?

The Software-as-a-service (SaaS) industry has experienced strong growth over the past few years assisted by the booming technology sector. In 2021, the SaaS market is estimated to be worth approximately $145.5 billion. The sector’s revenue is even expected to soar to more than $307 billion by 2026.

Companies in the SaaS industry have done relatively well in 2021, for example, firms like Salesforce (CRM) and Microsoft (MSFT) have seen their share prices rise to all-time highs. The same is also true for companies like Adobe (ADBE) and Hubspot (HUBS). This growth has been helped by large buyouts such as the CRM’s acquisition of Slack and MSFT’s acquisition of Nuance Communications.

In this article, I will look at a recently announced deal by Zendesk (ZEN) to acquire Momentive Global (MNTV), in a deal valued at more than $4.1 billion. 

Zendesk to Acquire Momentive Global

Zendesk is a SaaS company that provides customer support solutions to companies around the world. It has more than 170,000 customers, including well-known brands like Tesco, Upwork (UPWK), Uber (UBER), and Khan Academy, among others. 

According to Gartner, the company is in the leader’s quadrant section for customer relationship management companies along with firms like Salesforce, Oracle (ORCL), and PegaSystems (PEGA).

Source: Zendesk

On October 28th, Zendesk announced that it would acquire Momentive Global, the parent company of SurveyMonkey for $4.1 billion, which will close in the first half of 2022, if the shareholders of the two companies agree to terms.

Zendesk investors have not looked favorably on the acquisition, as shares of ZEN have fallen more than 20% since it was announced.  Wall Street analysts also criticized the deal. Data compiled by Marketbeat showed that at least 9 analysts from companies like Wolfe Research, Stifel, Bank of America, and Piper Sandler all downgraded the company after the deal. 

However,  Zendesk believes that Momentive will help it diversify its revenue and boost growth. At the same time, the management expects that the deal will lead to substantial synergies since the two companies have some overlapping departments.

Despite analysts being bearish about the deal, I am bullish on the acquisition.  Historically, the stock price of acquiring companies tends to decline as investors digest the news. For example, Salesforce stock price fell by almost 10% after the company announced its acquisition of Slack on December 1, 2020.  However, shares are up 25% since then. 

Second, the biggest SaaS companies have grown by combining organic growth and acquisitions. Salesforce is a good example of this as the company has become a market leader in its industry by spending billions in acquisitions. In addition to Slack, some of Salesforce’s biggest acquisitions have been Tableau, and MuleSoft.

Also, a company like Microsoft has boosted its market share by acquiring companies like LinkedIn, Ally.io, and Nuance. Therefore, there is a possibility that Zendesk will expand its solutions and market share through this acquisition.

Third, the deal makes sense because Momentive is a fast-growing company. For example, it has grown its revenue from just $203 million in 2016 to more than $375 million in 2020. In its most recent quarter, the company recorded a 20% year-over-year revenue growth.

For 2021 and 2022, analysts expect that the company’s revenue will rise to $441 million and $532 million, respectively. Therefore, the two firms will likely cut costs and boost profitability in the coming years.

In addition, SurveyMonkey operates in an industry that is seeing strong growth as companies seek more insights into their customers and even employees. It has been said that data is the most important resource of our time and the industry is expected to grow to more than $10 billion by 2025. 

The Bottom Line

The Zendesk stock price fell after it announced the acquisition of Momentive as Wall Street analysts downgraded their outlook for the stock. However, I believe that the fears about the implications of the deal have been overblown and that the stock will bounce back. I think that the MNTV’s survey business will help to complement ZEN’s customer relations solutions and add value to their shareholders.