What happened

Shares of Zendesk (NYSE:ZEN) were down about 16% after hours Thursday and 26% for the week, according to data from S&P Global Market Intelligence. While this was no doubt a rough week for shareholders, the company reported some solid numbers in its third-quarter earnings report.

However, in conjunction with that report came the announcement of a large acquisition. Apparently, Wall Street didn't think very highly of the deal, and shares reacted quite negatively.

Young man in suit cowers under a downward sloping line on wall above him.

Image source: Getty Images.

So what

In the third quarter, Zendesk's revenue grew 32%, beating analyst expectations and impressively accelerating for the third quarter in a row. Adjusted (non-GAAP) earnings per share of $0.17 was in line with expectations.

There were some very positive elements within the report. Zendesk is gaining traction with larger enterprise customers. This is the result of its Zendesk Suite product launched this year, which includes and integrates all Zendesk products, to help businesses communicate with customers in a variety of ways.

Large customers with annual recurring revenue over $250,000 increased to 37% of total revenues, up from 30% last year and 25% in 2019. The net expansion rate accelerated to 122%, above the company's long-term guidance of between 110% and 120%. In the wake of the past-quarter's strong performance, Zendesk management even hiked its full-year guidance.

So, if results were solid, why did the stock fall? In conjunction with the earnings release, Zendesk announced the acquisition of Momentive Global in a $4.1 billion all-stock deal. Momentive is the parent company for the widely known SurveyMonkey customer-survey tool.

The purchase price represented a 12% premium to Momentive's closing price on Thursday. Momentive CEO Zander Lurie will continue to head the Momentive unit within Zendesk after the deal's close, which is supposed to happen in early 2022.

Now what

Wall Street really didn't seem to like this deal, with both companies' share prices actually falling after hours. Usually, at least the company being acquired sees its share-price rise on a deal announcement. However, Momentive's share price actually fell. That perhaps means investors think Zendesk is paying too much for the company or that the deal won't reap a whole lot of synergies.

For its part, Zendesk believes it can cross-sell Momentive's survey and market-research capabilities to more enterprises on the back of its better penetration there, and that the deal will expand the combined company's total addressable market from $85 billion to $165 billion.

Only time will tell if the combination works out, but Zendesk does appear to be quite cheap at the moment, with shares now at their lowest since mid-2020. The company's market cap is now at less than 10 times this-year's sales projections.

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