Salesforce Is Acquisition Bait

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Salesforce has scheduled a press conference tomorrow to announce a strategic partnership with a “leading Internet company based in the Bay Area.” CEO Marc Benioff and a “special guest” will make the announcement together.

The smart money is betting that the partner is Google, and that the announcement itself won’t be much to write home about. Most likely it will be tighter integration between the companies. One rumor says that Salesforce customers may get a discount on Adwords if they bid through Salesforce’s software.

More evidence for this: Salesforce sent me an email about this comment on my previous post by “Lorilee Walton,” saying that it “may contain sensitive internal information being posted by an internal employee” and asking for information on their email and IP address (I did not supply it to them).

But whatever the announcement is, assuming the partner is Google, it will send a strong signal to Microsoft: Google and Salesforce are aligning against the Washington giant.

Salesforce: Acquisition Bait

Speculation that Google was actually going to acquire Salesforce was running rampant through the hedge fund circles a few weeks ago. This rumor may have led to the recent increase in Salesforce stock, which trades at an eye-popping 4,000+ P/E ratio (to put this in perspective, Google and Microsoft have P/E ratios of 45 and 22, respectively). The stock increase isn’t due entirely to the rumors, of course. The company continues to report strong sales growth.

And a perfect storm is brewing for Salesforce. They are a leader in their market, and they just happen to fill in a lot of the gaps in Google’s going forward strategy. I present the argument for this below, which is based on interviews with a number of analysts and industry experts.

Also: Salesforce CEO Marc Benioff is known to be somewhat checked out, spending as much time as possible in Hawaii and letting his lieutenants run the day to day operations of the company. If Salesforce sold for $80-85 (it is currently just under $50), Benioff would be able to put another billion or so in his pocket and mark his place in the history books as the guy who popularized the notion of delivering software through the browser. He could spend his days lounging in Hawaii, writing more books, and speaking.

Why It’s A Perfect Fit With Google

Google is quite simply on a collision course with Salesforce. Google CEO Eric Schmidt recently said that Google is all about Search, Software and Ads. They already dominate search. In advertising, the next battle will be over auction exchanges. Google already picked its horse in that race when it acquired DoubleClick for $3.1 billion in April. Yahoo and Microsoft quickly acquired their own startups in this space as well – Yahoo bought RightMedia for $680 million and Microsoft acquired aQuantive for $6 billion.

That leaves software, and until last week it wasn’t clear exactly how Google would be competing with Microsoft’s dominance in the operating system and office space. But then Google introduced Google Gears. Google is now turning its office products into full offline applications. In the near future users will be able to use Gmail and Google Docs & Spreadsheets offline, with full read/write functionality. They’re bypassing the operating system (the browser is the new operating system) and their apps will now offer a real alternative to Outlook and Office. Small and medium sized businesses will no longer have just one real choice when loading (and paying for) software on their PCs.

And when you combine all that stuff with Salesforce’s CRM apps and developer platform, Microsoft has a real problem. The future of software delivery is the browser. Google’s betting on it. Salesforce has already made a business at it. And Microsoft, with Office Live and Silverlight, is placing some bets there too.

But that’s not all. Google has known for years that they need a real sales staff to get distribution of their products. They have always had direct sales reps for Adwords, and they just bought a whole lot more with DoubleClick. Salesforce has a huge telesales team and a smaller direct sales team pushing their products to the enterprise quite effectively. Google doesn’t have the staff, expertise or contacts to sell their stuff into the enterprise.

Google’s office products haven’t made any headway into the enterprise yet. Microsoft Exchange is simply too good and most medium and large businesses rely on it. Without a sales team, Google has no hope to get into the market quickly, even with Google Gears to make their apps work offline. Add Salesforce’s sales team into the mix, though, and you have a whole new playing field. The combined entity will be able to offer fully functional offline applications for email, office, and CRM (I’d expect Google to use Gear to quickly create offline versions of Salesforce CRM and App Exchange). Given the huge cost savings, this combined entity would surely get sales traction quickly.

Microsoft Can’t Let This Happen

As I said above, Microsoft knows that Salesforce’s model is the future – their Office Live and Silverlight products confirm this. They have no particular reason to want Salesforce, but they have a very big reason to keep it out of Google’s hands. A combination of Salesforce’s sales team and CRM software with Google’s Office docs and Google Gears to make the whole suite work offline is a real competitive threat to Microsoft Exchange. If Exchange crumbles, Microsoft could lose its control of the Office space. And since the future of software is delivery through the browser, Vista becomes an afterthought. Google and Salesforce software will run just as well on Macs and linux machines. When the enterprise market sees that they can knock $500 or more off the cost of a computer by going linux and Google/Salesforce, many will walk away from Microsoft completely.

This All Points to a Bidding War

Google wants Salesforce. Google Office fits perfectly with Salesforce CRM and App Exchange. Google can take all of it offline with Gears. And Salesforce can sell it with their existing sales team. And the timing is right – Benniof is signalling that he is ready to retire.

But Microsoft can’t let that deal happen, and is very likely to enter a bidding war to try to keep Google and Salesforce apart. They walked away from the DoubleClick deal, then bought aQuantive for $6 billion just to stay in the game. If they hear that Salesforce is selling, they’ll be right there making a bid. Otherwise, they may just let Google do a complete end-around on their OS and Office businesses. And that could kill them in the long run.

Salesforce has competitors, and Microsoft could always go after them instead if Google buys the company. But NetSuite, the largest, is going public and is controlled by Oracle’s Larry Ellison. He won’t let a sale to Microsoft happen, before or after an IPO. Next in line is RightNow, which is a very distant third in this market.

By the way, there are some interesting personalities pushing all of this behind the scenes. The most important is a guy named Paul Chamberlain at Morgan Stanley. Chamberlain represented TellMe and aQuantis in their sales to Microsoft, so he knows exactly how to pitch them. And since Morgan Stanley took Salesforce public, it would be a natural fit to hire Chamberlain to represent them in a sale. My guess is he’s busy meeting with execs from all three of these companies, pitching a deal. And he may just put it together sometime soon.

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