(Bloomberg) -- A large Zendesk Inc. investor planning to vote against a planned takeover by private equity firms has proposed an alternative strategy that includes a $4 billion investment to keep the software company independent.
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Light Street Capital Management, which owns more than 2% of Zendesk, also wants the company to expand its board and replace Chief Executive Officer Mikkel Svane, who would remain chairman under the proposal.
The firm said in a letter to Zendesk’s board it plans to vote against the $9.5 billion takeover by private equity firms Hellman & Friedman and Permira, saying it’s too low. Instead, Light Street is offering to recapitalize the company with $2 billion in preferred shares and $2 billion in an incremental debt facility. Together with $1 billion of cash from the balance sheet, Zendesk could then conduct a $5 billion tender offer at $82.50 per share, the firm said.
“We believe the private equity playbook from here is obvious -- drive this business to higher profitability then sell to one of the interested strategic buyers who evaluated Zendesk during this process,” Light Street founder Glen Kacher said in a letter to the board Sunday, a copy of which was reviewed by Bloomberg News. “With higher margins, Zendesk is much more likely to be immediately accretive to these buyers, enabling them to pay a much higher price and appease their own shareholders.”
Zendesk will “carefully” review the proposal with its advisers, the company said in a statement. Zendesk shares rose 0.1% to close at $76.60 in New York trading Monday.
Light Street is calling on the San Francisco-based company to expand the size of its board to 10 seats, including five independent directors -- two of those to fill vacant positions and three to replace current directors. The investor also wants a new CEO with a successful track record in the software business. Light Street wants three of its nominees for the board to participate in a CEO search.
Zendesk agreed to be acquired in June by a buyout group led by Hellman & Friedman and Permira. The deal came together after Zendesk failed to win support from its shareholders to acquire Momentive Global Inc. in an all-stock transaction valued at about $4 billion when the the deal was struck in October.
The transaction was met with a dramatic sell-off in both companies as investors balked at the tie-up. Zendesk shareholder Janus Henderson Group Plc came out against the acquisition and activist investor Jana Partners also urged shareholders to reject the deal.
Light Street said in its letter that it believed Zendesk was willing to sell at any price after a series of “self-inflicted missteps.”
“With increased focus on driving meaningful operating margin expansion and fresh leadership, we believe that shareholders can realize private equity style returns in the public markets,” Kacher said.
(Adds Zendesk response in fifth paragraph.)
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