Zoom faces US security review of US$14.7 billion deal for Five9 over China ties

Review comes as influential proxy voting adviser recommended against Five9 deal over political risks associated with Zoom’s ‘substantial operations in China’
Justice Department review adds additional regulatory layer to an inquiry already being conducted by the FCC

Banking & finance

Chad Bray

Published: 2:00pm, 22 Sep 2021

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The US Department of Justice has called for a review of Zoom Video Communications’ planned US$14.7 billion acquisition of cloud-based customer service provider Five9 on national security grounds.

The review comes as Institutional Shareholder Services, an influential proxy voting adviser, recommended last week that investors reject the deal in part because of potential political risk associated with Zoom’s “substantial operations in China”.

In its letter to the Federal Communications Commission (FCC), the Justice Department did not directly reference the videoconferencing company’s China operations, but said an inter-agency committee that reviews foreign participation in the US telecommunications sector should review potential risk raised by “foreign relationships and ownership” associated with the deal and determine whether it poses a threat to “national security or law enforcement interests”.

The review by the Committee for the Assessment of Foreign Participation in the United States Telecommunication Service Sector adds an additional regulatory layer to an inquiry already being conducted by the FCC.

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Zoom, which counts Hong Kong’s wealthiest man Li Ka-shing as an early investor, said it expects to receive required regulatory approvals for the deal and for the transaction to close in the first half of next year.

“The Five9 acquisition is subject to certain telecom regulatory approvals,” a Zoom spokesperson said. “We have made filings with the various applicable regulatory agencies, and these approval processes are proceeding as expected.”

Five9, which is based in San Ramon, California, did not respond to a request for comment.

The Wall Street Journal reported the review earlier on Wednesday.

Zoom CEO and founder Eric Yuan. Photo: Getty Images

Zoom’s videoconferencing software has become a ubiquitous tool for businesses and consumers in the past 18 months as the coronavirus pandemic has restricted global travel and forced cities and countries into lockdowns to prevent against the spread of Covid-19.

However, the San Jose, California, company has faced scrutiny over its reliance on developers in China and “mistakenly” routing some conference calls through China last year, raising privacy concerns.

“In our urgency to come to the aid of people around the world during this unprecedented pandemic, we added server capacity and deployed it quickly – starting in China, where the outbreak began. In that process, we failed to fully implement our usual geofencing best practices,” Eric Yuan, the China-born American CEO of Zoom, said in a blog post last year. “As a result, it is possible certain meetings were allowed to connect to systems in China, where they should not have been able to connect. We have since corrected this.”

In December, US prosecutors filed criminal charges against a former Zoom employee based in China, accusing the employee of censoring virtual meetings commemorating Beijing’s crackdown on the pro-democracy movement in Tiananmen Square in 1989.

Zoom said at the time that it fired the employee for violating company policies and cooperated with US officials in the inquiry.

Following the Tiananmen commemoration incident, the company said it would not allow requests by the Chinese government “to impact anyone outside of mainland China” and stopped direct sales of its products in the mainland in August 2020, instead offering sales through local, third-party partners.

Zoom is also facing inquiries from US prosecutors in New York and California over its interactions with foreign governments and officials, including the Chinese government, as well as information about its storage of user data, its privacy policies and its actions related to the Tiananmen commemorations.

“We are fully cooperating with these investigations and have been conducting our own thorough internal investigation,” the company said in a regulatory filing last month. “These investigations are ongoing and we do not know when they will be completed, which facts we will ultimately discover as a result of the investigations, or what actions the government may or may not take.”

This article appeared in the South China Morning Post print edition as: Zoom deal faces US security review over China ties

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