The billion-dollar Zoom-Five9 deal could be in jeopardy, as US probes China ties

• The US government has been ramping up scrutiny of Zoom’s China ties
• A Team Telecom review of the nearly US$15 billion deal between Zoom and Five9 will see if it “poses a risk to the national security or law enforcement interests” of the country
• Zoom is also facing multiple ongoing federal investigations related to its dealings with Beijing

In Zoom Video Communications Inc.’s latest quarterly filing last month, it was stated that the California-based tech company has been under fire recently for its links to mainland China. The US government has in fact has been ramping up its scrutiny of Zoom’s China ties and now the latter’s blockbuster US$14.7 billion acquisition of cloud contact center software Five9 Inc. is seen as a ‘risk’.

The Justice Department last year charged one of Zoom’s China-based executives with conspiring to disrupt video conference commemorations of the Tiananmen Square democracy protests. Further to that, Zoom’s latest quarterly filing last month indicated that the video conferencing giant is also facing multiple ongoing federal investigations related to its dealings with Beijing.

Why the deal between Zoom & Five9?

In a letter posted on the Federal Communications Commission (FCC) website last month, the Justice Department requested the FCC defer action on the license application until an interagency committee known as Team Telecom finishes its review, putting Zoom’s Five9 deal on hold.

Then this week, the Justice Department-led panel said it is investigating Zoom’s deal to buy the American customer-service software company due to the potential national-security risks posed by the popular videoconferencing giant’s China ties. 

Team Telecom is reviewing a license application that arose from Zoom’s nearly US$15 billion deal to buy Five9 to see if it “poses a risk to the national security or law enforcement interests” of the US, according to the FCC letter. The department highlighted that there could be a risk from “the foreign relationships and ownership” associated with the application.

Zoom has said that it expects to receive regulatory approvals by the first half of next year, which could still leave it on track to close the deal according to the initial timetable. Telecommunications analysts reckon that any such negotiations with Team Telecom, which reviews foreign investment in FCC-regulated entities such as Five9, could put Zoom in the crosshairs of officials both in the US as well as China, where a significant crackdown on the tech industry is already underway.

Team Telecom’s China-focused review is the latest example of US officials’ wariness over Chinese telecommunications issues. US regulators including the FCC and Team Telecom have in recent years accelerated a campaign to root out Chinese links to U.S. telecommunications infrastructure.

In regards to the company’s links to China, Zoom has reiterated its Silicon Valley headquarters and the US citizenship of its China-born chief executive, Eric Yuan. Many of Zoom’s engineers have historically been based in China, and US  prosecutors have accused it of improperly working at the behest of the Chinese government.

Meanwhile on the Five9 end, Institutional Shareholder Services Inc. (ISS) recommended shareholders not to sign off on Zoom’s offer to acquire the company because stock volatility has made the deal less attractive. While Five9’s board recommends the deal, ISS feels that shareholders aren’t getting a fair shake.