Salesforce Plus Slack Doesn't Equal Microsoft -- Heard on the Street

By Dan Gallagher

Salesforce.com has never been one for thinking small, but buying Slack Technologies stretches the company's ambitions to a whole new level.

Salesforce formally announced the $27.7 billion deal Tuesday afternoon, confirming a report by the Wall Street Journal last week that the two were talking. The mostly cash offer values Slack at about $45.50 a share, which is a 54% premium to its unaffected price and represents a multiple of about 26 times forward sales. As such, Slack is Salesforce's most expensive deal by multiple measures. Its previous two acquisitions -- $14.7 billion for Tableau Software last year and $5.8 billion for MuleSoft the year before -- valued those enterprises at 11 times and 15 times forward sales, respectively, estimates Brent Thill of Jefferies.

So Salesforce investors are understandably uneasy; the stock has dropped more than 7% since news of the deal first surfaced last week. The shares slipped another 4% after hours following the announcement Tuesday, likely because the transaction includes a higher-than-expected cash component that will require Salesforce to take on additional debt.

An acquisition of this scale is a bit of a surprise even considering the highly acquisitive company's history -- particularly since Chief Executive Marc Benioff observed in late August that "we're not in a good M&A environment." He wasn't wrong. Cloud valuations had already been soaring, with the BVP Nasdaq Emerging Cloud Index up 68% for the year by that point, compared with a 28% gain for the broader Nasdaq Composite. The cloud index is now up 88%, with several companies in the group now fetching multiples of more than 30 times forward sales.

That might make Slack seem a bargain as its stock had been underperforming its cloud peers prior to last week's news. But there are reasons for that underperformance: The pandemic's great work-from-home shift hasn't boosted Slack's business the way it has for other cloud-based services such as Zoom Video and Shopify. Slack also continues to be weighed down by the perception that it is in a losing race with Microsoft, which has been heavily promoting its Teams workplace-collaboration platform.

Buying Slack puts Salesforce squarely in that competitive dynamic. It won't close the gap completely, though, as Teams also offers features such as videoconferencing that a combined Salesforce-Slack won't have. Microsoft also bundles Teams with its Office software, effectively giving the collaboration service away free. Salesforce will be hard-pressed to match that if it hopes to justify the hefty price tag for Slack. Mark Moerdler of Bernstein thinks that, if Salesforce intends to compete directly with Microsoft in the collaboration segment, even more acquisitions will be needed.

That worry will hang over Salesforce, even if the company continues to put up good numbers. The fiscal third-quarter results that were also reported Tuesday afternoon included a raised forecast for the fiscal year ending in January as well as an early projection for the next fiscal year that was ahead of Wall Street's targets.

That projection confirmed yet another year of growth exceeding 20%, which is impressive for a newly minted Dow component. But a combined Salesforce-Slack still generates less than 40% of the revenue of Microsoft's commercial cloud segment, which also includes the fast-growing Azure business. Acquiring Slack will only further the notion that Salesforce has to buy at least some of its growth -- and that it will have to keep writing bigger checks to do it.

Write to Dan Gallagher at dan.gallagher@wsj.com

(END) Dow Jones Newswires

December 01, 2020 18:51 ET (23:51 GMT)

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