The failed $14.7 billion acquisition of call centre software provider Five9 by Zoom Video Communications has highlighted concerns that will weigh on the virtual meeting giant's next attempt to expand through dealmaking, according to analysts and investment bankers.

Zoom's decision not to include cash in its bid and instead rely on its stock as currency to pay for the Five9 acquisition backfired when its stock fell dramatically in the weeks following the deal's announcement in July, on fears that the return to physical meetings as the COVID-19 pandemic faded would erode its business.

Last week, 59% of shareholders voted against the deal.

According to investment bankers and experts, Zoom's stock will likely stay volatile until investors have a better understanding of the company's potential once the pandemic is over. According to them, this reduces the likelihood of another acquisition target using Zoom's shares as currency in the foreseeable future.

Zoom has nearly no debt, but as of the end of July, it only had $2 billion in cash, which it needs to fund expansion plans.

"Zoom needs to figure out how to keep some of the individual subscribers who may not require Zoom when they return to more physical lives," said Alex Zukin, a Wolfe Research analyst.

Zoom has declined to comment on the matter.

Zoom saw a huge increase in subscribers — and revenue — thanks to the pandemic - The Verge

Another potential stumbling block for the next firm to garner Zoom's acquisition attention is its ties to China. Last year, at the behest of the Chinese government, US prosecutors prosecuted a former Zoom executive for disrupting video meetings honouring the 31st anniversary of the Tiananmen Square crackdown.

Last month, a committee formed by the US Justice Department announced that it was looking into Zoom's proposed acquisition of Five9 to see if it "poses a risk to national security or law enforcement interests."

While the Zoom proposal was rejected by Five9 shareholders before the regulatory assessment was completed, experts said the regulatory involvement exposed a risk that will continue to be a concern for other acquisition targets.

"Transactions involving companies with engineering talent or other operations in China are likely to be scrutinised more closely by the US government," said Sujit Raman, a former US Associate Deputy Attorney General who is now a partner at law firm Sidley Austin LLP specialising in government investigations.

Zoom wanted to buy Five9, a company whose call centre software is used by over 2,000 firms across the world to connect with their customers, in order to expand its product offerings beyond its flagship teleconferencing. Without a game-changing purchase, Zoom shareholders are likely to be concerned about the company's reliance on virtual meetings, which have reached their peak popularity, according to some investors.

Five9 and SightCall

An activist hedge fund, according to Dianne McKeever, chief investment officer of investment firm Ides Capital Management, could try to take advantage of the situation by collecting a stake in Zoom and press for reforms.

"Forced selling by generally short-term oriented, event-driven funds might provide an outsized value opportunity for a long-term investor when a deal falls apart," McKeever explained.

There are numerous examples of corporations that have incurred investor wrath after botching an acquisition attempt. TCI Fund Management, one of Canadian National Railway's largest investors, is demanding for the railroad's CEO to go following the railroad's failed $29 billion acquisition attempt for Kansas City Southern.

Willis Towers Watson, whose $30 billion merger with insurance broker Aon was called off earlier this year due to regulatory objections, has attracted activist hedge funds Starboard Value LP and Elliott Management Corp.

To be sure, some activist hedge funds may find Zoom's shares to be too pricey, according to analysts. It's also unclear whether Zoom will find an acquirer, which is something some activist hedge funds may fight for.

Even so, some investors may view a failed acquisition as a warning from the company's board that it is unable to unlock further value, according to Lawrence Elbaum, co-head of law firm Vinson & Elkins LLP's shareholder activism practise.

"This puts their board positions at risk in the event of an activist campaign," Elbaum added.