Zendesk (NYSE: ZEN), a leading complaint management services provider, recently announced its third-quarter results that continued to outpace the market’s forecast. The big news for Zendesk though was the $4 billion acquisition of Momentive announced last month.

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Zendesk’s Financials

Zendesk’s revenues grew 32% to $347 million, ahead of the market’s estimate of $334.92 million. GAAP net loss was $38.9 million. Adjusted EPS of $0.17 was ahead of the Street’s estimates of $0.16.

For the fourth quarter, Zendesk expects revenues at $366-$372 million, compared with the market’s forecast of $362.89 million. For the full year, it expects revenues of $1.329-$1.335 billion compared with the market’s forecast of $1.31 billion.

Zendesk’s Momentive Acquisition

Recently, Zendesk announced the acquisition of San Mateo-based Momentive for an estimated $4.1 billion. Momentive used to be formerly known as SurveyMonkey, a global provider of online surveys. SurveyMonkey had rebranded itself as Momentive to assert its growth into other markets besides online surveys. Momentive operates a Representational State Transfer (REST)-based API strategy for its platform that allows developers to build apps that can customize, automate analysis, and engage customers through instant responses to customer feedback. It allows developers to list apps publicly on its marketplace as well. Currently, there are more than 100 public apps on the SurveyMonkey platform aimed at various activities such as analytics, customer support, and marketing.

The acquisition will allow Zendesk to create a customer intelligence company. It believes that the addition will be accretive to its current operations and help accelerate Zendesk’s revenue plan to $3.5 billion in 2024, instead of the earlier target of 2025. Momentive’s customer base and complementary capabilities will help provide Zendesk with significant opportunities for joint product adoption and drive Momentive’s enterprise growth. It believes that the integrated entity will be able to offer improved customer feedback gathering and analytic capabilities and help Zendesk address issues to deliver a better customer experience.

I think Zendesk is counting on significant rationalization of marketing and sales costs that will be achieved post acquisition. Zendesk would be looking to sell more through its extensive sales team, and this acquisition achieves that rationalization if they can do a good job of the integration. I’m not sure how much of the combined sales and marketing organization they would shed, but I expect, they will be shedding a big chunk to achieve enhanced revenue while cutting sales costs.

Momentive had raised $1.1 billion in five rounds of funding led by Morgan Stanley, Chris Finley, T. Rowe Price, Ryan Finley, Capital G, INCONIQ Capital, Social Capital, Tiger Global Management, and Baillie Gifford. It had listed in 2018 by raising $180 million at a valuation of $1.5 billion. Earlier this year, Momentive had reported quarterly revenues of $109 million with a loss of $0.01 per share. It was looking to end the current year with revenues of $443-$447 million.

The market was not very pleased with the transaction. Zendesk’s acquisition price is almost a third of its market capitalization. Additionally, Momentive’s growth rate of ~20% has been slower than Zendesk’s 30+% growth rates. Zendesk’s stock slipped 17% post the announcement of the acquisition. It is currently trading at $104.13 with a market capitalization of $12.6 billion. It touched a 52-week high of $166.60 in February and a 52-week low of $92.00 earlier this month.