The US Department of Justice has raised national security concerns in connection with Zoom Video Communications’ planned takeover of the cloud software company Five9, calling for a secondary review of the web conferencing provider’s agreed $14.7bn deal.
In a letter to the Federal Communications Commission, the department’s national security division said an inter-agency committee to assess “foreign participation” in the US telecoms sector should examine whether Zoom’s purchase “poses a risk to the national security or law enforcement interests of the US”.
The FCC, which is the main US telecoms regulator, has been examining the deal, but a committee review would add another layer of regulatory involvement.
Zoom’s reliance on a large base of developers in China has long raised questions about potential Chinese influence on its operations. The San Jose, California-based company has maintained that none of its customers’ data flows through its servers in the Asian country, though it admitted last year it had mistakenly routed some calls through China.
One of its executives in China was also found to have co-operated with Chinese authorities to block video conferences commemorating the 1989 Tiananmen Square protests, even though they were hosted in the US. Both cases have become the focus of DoJ investigations.
“US DoJ 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 FCC] should adjudicate this application,” the justice department said in the letter dated August 27.
The DoJ letter comes as US officials in sectors including antitrust, foreign investment and securities regulation take a tougher stance towards Chinese investment in American companies, amid cooling relations between Washington and Beijing.
Zoom said: “The Five9 acquisition is subject to certain telecom regulatory approvals. We have made filings with the various applicable regulatory agencies, and these approval processes are proceeding as expected. We continue to anticipate receiving the required regulatory approvals to close the transaction in the first half of 2022.”
San Ramon, California-based Five9 declined to comment.
Zoom’s deal to buy Five9, announced in July, would mark the company’s first major acquisition. The all-stock transaction valued the Five9’s shares at $200.28 with investors set to receive 0.5533 shares of Zoom class A common stock.
However, Zoom’s falling stock price and concerns about its post-lockdown prospects have cast a shadow over the deal. The company’s share price has declined 23 per cent since the transaction was announced and now values Five9 at $154 a share, significantly lower than its current $170 price.
Institutional Shareholder Services, the influential proxy advisory firm, has recommended that Five9 shareholders vote against the transaction citing concerns about the company’s growth as pandemic social-distancing measures ease.
“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,” ISS wrote in a report released last week.
The proxy adviser also cautioned against political risks associated with Zoom’s “substantial operations in China”.
News of the justice department’s letter was first reported by the Wall Street Journal.