For the past several weeks we’ve been hearing persistent rumors that somebody is going to buy Salesforce.com. The company delivered its quarterly report last week, performing decently, seeing its share price and market capitalization grow as a result. Yet in spite of ongoing industry gossip, it remains unlikely anyone will buy the crown jewel of SaaS.
For example, last Friday, reports surfaced that Salesforce rejected a $55 billion offer from Microsoft because Salesforce CEO Marc Benioff is supposedly looking for a $70 billion price tag. If that report is true, the chances of Salesforce being sold are slim to none.
Salesforce is not just any SaaS company. It has a market cap just under $50 billion, making it an expensive and difficult target. There are only so many companies that can afford its dollar cost — Microsoft, Oracle, IBM, SAP, and perhaps HP — and each one seems to have tried in the last several weeks only to get shot down.
Last week, SAP made it clear yet again that it had no interest whatsoever. Its chief executive Bill McDermott told Reuters he doubted any of the possible suspects would buy Salesforce because it’s simply too rich even for these wealthy tech vendors’ blood.
If Benioff is really looking for $70 billion, he could be right.
Each time a fresh acquisition rumor surfaces, Salesforce’s share price picks up, and when the stock settles down again, irrational critics pop up out of the woodwork pointing to the flagging stock as a sign that Salesforce is slumping as a company.
One industry insider we spoke to when the rumors first floated suggested that Salesforce made the rumor public to drive up the share price, and also because it had fiduciary responsibility to pursue any legitimate purchase attempt. Of course, holding conversations that could benefit the company is something altogether distinct from leaking that those talks are taking place.
While we in the press are thankful for that sort of disclosure, pushing your share price up and down artificially could confuse shareholders more focused on internally sourced value. Also, acquisition rumors distract employees and sales targets that might worry that the company they are about to buy might become a subsidiary (with all the baggage that such a transaction entails) of a larger firm that might be less willing to hold up its part of a deal.
What Makes Salesforce Attractive?
It isn’t hard to guess why Salesforce is a potential target for acquisition. Worth roughly one Uber, the company is currently generating revenue at a $6 billion tip. The company’s most recent quarter included an adjusted profit of $0.16 per share on top line of $1.51 billion. The company expects its revenue to grow to $1.59 billion in the current quarter, generating even more adjusted profit.
Benioff noted in the company’s earnings release that Salesforce will reach a run rate of $7 billion in its current fiscal year.
In short, Salesforce has a proven model, massive revenue, and profits that are besting market expectations. The ripple under that particular pond, however, is that the company is barely profitable when normal accounting measures (non-GAAP) are taken into account. Fully accounting for costs, Salesforce turned a mere $0.01 per-share profit in its most recent quarter.
What would turn around that GAAP profit, perhaps to better match its adjusted net income? Lower sales costs and efficiencies, the burr in the side of every enterprise SaaS company. This bleeds both directions — if any acquiring party thinks that it could absorb Salesforce and help it accelerate its growth rates, which are in decline, and also boost its profitability at the same time, the SaaS company is inherently worth more than its current market valuation.
From the other direction, it seems unlikely that Salesforce thinks that it is currently overvalued and so it wants a higher price than its current share value dictates. And since it can do the same math as the acquiring entity, combinations of it with another company that could leverage its assets in an accretive, pacing direction should pay a premium given that they are about to unlock significant value. And keys are not free.
At the same time, the arguments in favor of a sale are also contra-debates, as Salesforce could, potentially, partner with a firm that might have looked to acquire it. Such a move would grant the smaller company the ability to sell more quickly, potentially bolstering its margins.
We don’t have to look too far askance for that idea to come into sight — it’s already happened with Microsoft.
It’s Probably Not Happening
When it all comes down to it, who knows why Salesforce sales rumors started surfacing or who benefited from them (besides journalists looking for a good story). With a rumored asking price of $70 billion — and who knows, perhaps Benioff is having a nice chuckle over that number wondering where it came from — it’s not going anywhere. If we had to guess, and why not speculate along with the rest of business and technology press, we would have to say it’s not going to happen.
It’s too expensive, and trying to make a purchase that large and expensive work, is going to take a huge leap of faith. Not only that, Salesforce has a unique culture. It encourages charity and giving to the community. It is looking at offering women equal work for equal pay and it has generally been a good corporate citizen. How would that fit in any of the corporate overlords we have mentioned as possible suitors?
Of course, Ben and Jerry’s got sold and it maintained its identity for the most part, so it can be done, but such a purchase would be an expensive gamble that most companies out there just wouldn’t be willing to take.
What’s more, any company that bought Salesforce, has to figure out what to do with Marc Benioff. If it were Microsoft, he is not going to get the top job there. Is he really willing to be an underling after all these years?
A wild card suitor could appear out of the blue, like say General Electric, an unlikely fit, but one industry insider suggested that it’s at least a possibility.
Of course, as a public company, Benioff and his Board of Directors have a responsibility to the company shareholders to listen and to give them the best return on their investment they can possibly attain. If it’s through a sale, then Benioff couldn’t say no, but such a scenario just doesn’t feel likely right now.
As for Salesforce, they had this to say: “Salesforce does not comment on rumors or speculation.” That was a shocking comment.
So Now What?
In this case, given the health of Salesforce, what happens next is that a $50 billion firm reaches the $7 billion revenue run-rate tier, placing it among an even smaller set of tech companies that have reached similar heights.
Following, Salesforce works to increase its profitability, switch from market judgment of its non-GAAP earnings to GAAP incomes, and, perhaps, even starts to pay a dividend and repurchase its shares.
When a former startup switches from discounting non-cash costs such as share-based compensation, to repurchasing that same equity with cash, you know that the company in question has finally grown up. And there is no shame in that.
After all, who needs a corporate parent?