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Salesforce.com
helped bring software into the cloud era, and now the company is once again trying to leave its mark. In agreeing to buy
Slack Technologies
for nearly $28 billion in cash and stock,
Salesforce
is making one of the priciest deals in tech history—and investors aren’t thrilled.
Salesforce has lost about 15% of its value, roughly $37 billion, since Nov. 25, when The Wall Street Journal first reported that Salesforce (ticker: CRM) and Slack (WORK) were in merger talks.
Analysts expect Slack to generate $890 million in revenue this fiscal year, which means Salesforce is paying more than 30 times sales for the communications platform. That’s a hefty price tag when you consider
IBM
(IBM) paid only 10 times sales for Red Hat, an open source software firm, in 2018. That deal came to $34 billion and remains the largest in software history.
Barron’s laid out a long-term bullish case for Slack in June 2019, shortly before the company went public through a direct listing. Slack’s first-ever trade came at $38.50, but the stock was below $30 when the Journal reported Salesforce’s interest. Ultimately, Salesforce is paying $45 for every Slack share, meaning early investors made a decent, though not great, return.
For Salesforce shareholders, the payoff is a bit less clear. Slack had sales of $235 million in its just-reported third quarter, up 39% from a year ago, and it reported one penny a share in adjusted profit, its first profitable quarter. But Slack is nowhere near sustained profitability. Slack’s growth has been slowed by intense competition from
Microsoft
(MSFT), which bundles its rival Teams software with the Office 365 productivity suite, effectively giving it away free.
Salesforce thinks it can rev up Slack’s growth by plugging the communications service into its own software suite, which is used by a devoted set of corporate sales teams. The deal comes at a substantial cost, though, including about $16 billion in cash. That’s far more than Salesforce has on hand, so the company plans to lever up.
For the deal to make sense, one has to believe Slack truly transforms Salesforce, giving the company access to new categories and an improved competitive position against Microsoft, which has its own set of sales tools.
Salesforce’s chief operating officer, Brett Taylor, told Barron’s that the transaction comes as digitization of the economy is accelerating. “The world after Covid will be a lot different than it was in 2019,” he says. “It changes what it means to grow your business, to sell from anywhere, to provide customer service from anywhere.” Slack, he says, offers Salesforce a unique opportunity to “navigate the new normal.”
“Slack was the first company I ever saw that really defined a new way of working,” Taylor says. “It’s a transformational deal. This will be one for the history books.”
Slack CEO and co-founder Stewart Butterfield will continue to run the company as a stand-alone business. He’s no small asset. The serial entrepreneur has built multiple companies, including the photo site Flickr, which was sold to Yahoo! for $25 million in 2005. Butterfield is among the most respected CEOs in cloud software and at 47 is almost a decade younger than Salesforce CEO Marc Benioff. It’s possible Salesforce has found itself Benioff’s successor.
And yet, investors are disgruntled. Citi analyst Walter Pritchard cut his rating on Salesforce to Neutral from Buy after the deal was announced. He thinks Salesforce could have simply teamed up with Slack, rather than spending so much on a company facing intense competition. He also thinks the deal raises questions about Salesforce’s own growth outlook. Pritchard’s bottom line: “We don’t think Salesforce needed to buy this.”
Write to Eric J. Savitz at eric.savitz@barrons.com