As Markets Rebound, This 1 Stock Could Start a Buyout Binge


The stock market has done a good job of recovering so far this week, and on Friday morning, it appeared that market indexes would continue their upward trajectory. The Federal Reserve is still aggressively fighting inflation by sending short-term interest rates higher, but the bond market has seemed to believe that recessionary pressures could come into play and limit the extent to which the Fed can tighten its monetary policy. As of 8:15 am ET, futures on the Dow Jones Industrial Average (^DJI 2.01%) had risen 200 points to 30,872. S&P 500 (^GSPC 2.19%) futures had gained 25 points to 3,825, and Nasdaq Composite (^IXIC 2.26%) futures had picked up 78 points to 11,816.

Declines in the tech stock universe have been far larger than what others have seen, and that has made many individual investors wary of putting money to work in the sector. However, institutional investors have had a lot more confidence in the long-term prospects for some innovative companies, and they’re starting to go bottom-fishing in order to pick up potential bargains. The latest target appears to be Zendesk (ZEN 27.38%)but it might well not be the last, and investors in hard-hit companies should be prepared for a rash of similar buyout bids that could leave them feeling disappointed.

Zendesk at half-off

Shares of Zendesk had been up nearly 50% in premarket trading on Friday morning before dropping back to a 30% gain. The customer-service cloud software platform provider announced it had made an agreement to get taken private by a group of institutional investors.

Reports surfaced late Thursday that a group of buyout specialists, including Hellman & Friedman and Permira, could be looking at making a deal to acquire Zendesk. The companies announced a final deal Friday morning. The decision stood in stark contrast to what Zendesk’s management has said, arguing that it intends to remain independent and publicly traded in the wake of its having completed a strategic review to assess potential options.

Outside investors have been putting pressure on Zendesk for quite a while. Jana Partners engaged in a proxy battle, aiming to put directors on the Zendesk board and seeking a different strategic direction. Jana had been critical of the cloud customer-service software provider’s failed attempt to acquire Momentive Global (MNTV 5.26%)and it had also argued that Zendesk should accept an earlier buyout bid to go private that was worth roughly $127 to $132 per share.

In part because of the involved, Zendesk stock fell sharply in May after having largely withstood the downward-trending market earlier in the year. Thursday’s close was more than 60% below its 2021 all-time highs, and even after this morning’s big jump, the stock trades at less than half its best levels.

What the deal looks like

The big question when the reports of a possible buyout surfaced was when whether Zendesk would be able to use the previous $127 to $132 per share range as a starting point and then go higher from here. That proved not to be the case, as the deal values ​​Zendesk at just $77.50 per share, or $10.2 billion in all.

It was a tough blow politically for the software company to accept less than that, but the environment for tech stocks has changed quickly. Buyers proved unwilling to pay up for Zendesk after the broad-based sell-off across the sector.

If the deal goes through, Zendesk’s acquisition will have implications for the entire high-growth tech stock universe. There’s nothing more disappointing for long-term investors than to hold shares through a big downturn in the belief that the company’s business will rebound, only to see institutional investors swoop in to buy them out and get a bargain deal. Those who bought at levels closer to its highs are ending up with locked-in loss as a result of Zendesk’s accepting the much-lower offer.

Buyout bids are big paydays for short-term traders, and the Zendesk buyout could open the floodgates for other institutional investors to make similar offers for a wider range of companies. Long-term individual investors will have only a limited ability to ensure that the management teams of the businesses whose shares they own will do the right thing and let them participate in a long-term rebound.

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