Stop me if you’ve heard this one before. News leaks that enterprise software giant Salesforce.com is interested in acquiring a trendy tech company. Then its stock falls 5%, erasing billions of market value.
Ring any bells? Back in 2016, it was CEO Marc Benioff’s circling of Twitter that prompted investors to flee. This time around, there’s angst about Salesforce’s reported interest in Slack Technologies. After the Wall Street Journal broke news of discussions between the two companies on Wednesday, the stock decline wiped US$13-billion from Salesforce’s market value.
Benioff ended up abandoning the approach for Twitter as ongoing discussions dragged the shares even lower. Slack looks like a more natural fit for his company than the social media firm, but the CEO is still, characteristically, asking for a lot of faith from investors. If the latter can swallow a high-looking price, then maybe that faith would be justified over the longer term.
If Salesforce were to pay a premium to Slack’s undisturbed share price of 30% (a fairly typical amount in M&A), it would value the messaging software maker at some $21-billion, including net cash. The snag is that Slack is not expected to generate any meaningful operating profit for years. So judged through the prism of returns on invested capital, payback from a deal would be many years off.
Indeed, Slack’s stock is already trading above the 30% premium level, indicating that the market expects a higher bid. Bloomberg Intelligence analyst Mandeep Singh sees a bid of more than $25-billion as feasible. That would make returns even harder to realise.
Hard to find
Savings from the combination will meanwhile be hard to find: Slack’s operating expenses totalled less than $1-billion in the 12 months to June. The success of a deal would therefore be dependent on extracting meaningful sales synergies (where a combined company is able to generate more revenue), which are always more difficult to predict.
But there is a strategic logic to a combination. Analysts expect Salesforce’s growth to slow over the next three years. Slack, meanwhile, has a sophisticated collaboration platform that smoothly integrates enterprise tools made by third parties. It could prove a valuable channel for Salesforce to reach new customers for its own sales-tracking tools. Yes, Benioff would be buying Slack’s existing growth, and expensively so, since it trades at a higher multiple of sales than Salesforce itself. But the combination of the two firms could have a multiplier effect. It could just take some time — likely more than five years — before the company starts seeing any material return on the investment.
That may be a risk worth taking, especially since Salesforce’s 52% stock jump this year means it can afford to do so. Its $224-billion market capitalisation and its capacity to take on debt give it deep pockets. Credit Benioff for having a longer-term vision.
A successful deal would help Slack, too. The company is suffering from Microsoft’s decision to offer its competing Teams product for free to users of its Office software suite. Slack could benefit from having a deep-pocketed parent that sees it more as a platform to sell its own high-margin product than as a standalone money-maker.
If Salesforce’s stock decline mimics what happened during the Twitter discussions of 2016, Benioff’s enthusiasm for a deal might wane. But under the right stewardship, Slack stands a chance of fending off Microsoft’s encroachment. And Salesforce would benefit. — (c) 2020 Bloomberg LP
