Salesforce Steps Up Dealmaking to Keep Pace With Rivals in Cloud

The company has broadened the scope of its acquisition targets to potentially much larger deals and those in industries that aren’t as clearly tied to the main enterprise-software business.

September 1, 2016

6 Min Read
Salesforce Steps Up Dealmaking to Keep Pace With Rivals in Cloud

(Bloomberg) — Inc. is in a buying mood.

Seeking to move into new markets and keep up with rivals pushing into businesses it helped popularize, the cloud-based software company has announced or completed deals worth more than about $3.5 billion since February, compared with just $60.1 million net of cash in the fiscal year that ended Jan. 31, according to data compiled by Bloomberg. This year’s total could have been much higher — Salesforce lost out on the acquisition of LinkedIn Corp. to Microsoft Corp., in the biggest tech takeover unveiled so far this year, with an agreed price of $26.2 billion.

While Salesforce has benefited for years as customers flocked to internet-based tools and services that let them avoid investments in data centers, the leader in software for customer relationship management is facing more intense competition than ever. As it scouts out new ways to fuel revenue growth beyond its traditional products, Chief Executive Officer Marc Benioff is likely to be looking for additional targets, including those in areas such as artificial intelligence or financial services, some analysts say.

"They’re trying to maintain growth — and look for new arenas," said Jack Andrews, an analyst at D.A. Davidson. "You can grow organically or you can grow inorganically."

Revenue Growth

Salesforce will report results for its fiscal second quarter on Wednesday, following a string of quarterly sales numbers that topped analysts’ estimates. Revenue in the period that ended in July is projected to be $2.02 billion, a gain of 24 percent from a year earlier. That’s slightly slower than the 27 percent expansion posted for the quarter ended in April, while in line with the total growth of the previous fiscal year. By comparison, sales at Workday Inc., a cloud-focused company that’s younger than Salesforce, have been rising at a rate of more than 30 percent a quarter.

While analysts will be watching Salesforce’s results and outlook, they’ll also be looking for any details about the company’s more aggressive acquisition strategy. Salesforce has broadened the scope of its targets to potentially much larger deals and those in industries that aren’t as clearly tied to the main enterprise-software business — such as its purchase of word-processing app Quip.

"It’s tough to say where they are headed right now on M&A," said Abhey Lamba, an analyst at Mizuho Securities USA Inc. "Investors are likely be cautious about the stock until they get more clarity about how management is thinking about its acquisition strategy."

The ripest markets for Salesforce to shop in include machine learning, data analytics and "back-end" software that helps manage processes around functions such as legal, human resources and IT, according to Joel Fishbein, an analyst at BTIG.

Chi Hea Cho, a spokeswoman for Salesforce, declined to comment, citing the company’s quiet period ahead of the earnings report.

Accounting, E-Commerce

The company could get a boost from acquisition targets that assist businesses with accounting, financial tools or other related products, including those already tied into Salesforce’s own services, according to Paul Hamerman, an analyst at Forrester Research. Potential candidates are startups such as accounting-services firm FinancialForce and Zuora, whose software manages billing and subscriptions, Hamerman said.

Salesforce unveiled its biggest deal ever in June with the purchase of Demandware Inc., whose cloud-based software is used to run retail websites and manage store operations. The acquisition pushed Salesforce into the e-commerce market, seen by many as a logical extension to its core software that lets workers manage customer relationships. Salesforce also has purchased companies that focus on artificial intelligence and data analytics, bolstering its ability to understand and use the growing reams of data being created by customers every day.

San Francisco-based Salesforce isn’t the only company racing to snap up smaller fish in the enterprise-software market. Rivals in the industry are also stepping up dealmaking as they sit on piles of cash accumulated in recent years, while many smaller companies, including closely held ones, have seen valuations slide — meaning they’re less expensive and management may be more open to offers. In addition to Microsoft, Oracle Corp. has opened up its checkbook, announcing a deal for more than $9 billion earlier this month to acquire software provider NetSuite Inc., which helps it compete with Salesforce. Indeed, Lamba said Salesforce may be ramping up purchases because it needs to strike deals before more targets are taken out by rivals.

Still, the biggest catch would have been LinkedIn, with its hundreds of millions of business profiles that many Salesforce customers probably already use to track down leads. Though Benioff’s interest helped push up the price that Microsoft had to pay, he ultimately lost out — in the end, the accord was worth about half of Salesforce’s market value, and dwarfed its cash holdings. Microsoft, which announced the deal in June, will get access to LinkedIn’s data and can use its technology with its own artificial-intelligence tools.

Quip Deal

Within weeks of Microsoft’s LinkedIn announcement, Salesforce rolled out a deal for Quip, a word-processing application for mobile devices, for almost $600 million. While it may not be as obviously tied to Salesforce’s main businesses, it does deliver users and the data they generate, crucial to advancing machine-learning technology.

"The Quip acquisition — which kind of came out of nowhere — in many ways was a reaction to losing LinkedIn to Microsoft," said Gordon Ritter, general partner at Emergence Capital, a lead investor in SteelBrick, which was acquired by Salesforce earlier this year. "In the age of machine learning, access to users and their habits and behaviors are going to be really important."

Before it embarked on this year’s spree, Salesforce could have ended up on the other end of the equation. Microsoft evaluated a bid for Salesforce last year after the cloud software company was approached by another potential buyer, people with knowledge of the matter said at the time. No deal ever came to pass.

Thanks to its strong position in customer relationship management, Salesforce is a leader in internet-based software, but rivals such as Oracle, SAP SE and Microsoft aren’t about to cede the fast-growing cloud market to their younger rival.

Microsoft has made cloud software a centerpiece of its strategy shift under CEO Satya Nadella. The company has rolled out versions of its popular business applications, including Office, that run from the internet, and its Azure platform enables customers to rent computing and storage capabilities. The software giant is making inroads fast — Microsoft’s commercial cloud revenue run rate topped $12.1 billion in the quarter ended in June 30, compared to more than $10 billion in the previous quarter.

Oracle’s Cloud

Oracle, a longtime Salesforce rival, has also invested in cloud-based services across its product line. In its last quarter, those products made up about 8 percent of the company’s total sales. Oracle, which competes with Salesforce’s main customer-relationship-management products, is about three times the size of Salesforce based on market value, while Microsoft is more than eight times as large. Yet Salesforce has almost $4 billion in cash on its books, making it possible that it could go after the same acquisition targets as Oracle.

"Salesforce has growing competition to their core business from both Oracle and Microsoft as well as pressure from Wall Street to grow their 2017 revenues," said Steve Herrod, a managing director at General Catalyst Partners, whose firm was an early backer of Demandware, though was no longer invested by the time of the acquisition. "Aggressive M&A activity can give them the opportunity to address both."

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