To cap off an extraordinary year for businesses worldwide, Salesforce has officially announced on the 1st of December, 2020 that it would be acquiring collaboration software developer Slack for $27.7 billion USD. This acquisition would go down as the second largest software transaction in history, the price of which represents a 55% premium to Slack’s market cap at the time of announcement. Markets reacted immediately as Slack’s stock price soared by 38% within the first day. Meanwhile, Salesforce’s stock plummeted by 15.4% from before the deal was announced, leading to a total loss in market value of $32 billion USD. Despite the drop in value, Salesforce and Slack are confident that this deal aligns with the strategic objectives of both firms, combining Slack’s business communications software with Salesforce’s Customer Relationship Management (CRM) products to create a comprehensive and collaborative enterprise platform.
Founded in 1999, Salesforce is an American cloud software company which primarily offers CRM services. The firm is one of the largest software companies in the world, employing 49,000 people around the world and currently sitting at a market value of over 204 Billion.
Salesforce has had a good year financially, surpassing $21 billion in annual revenue for 2020. That leaves an earnings-per-share figure of $4.62, which is well above analysts’ predictions. The recent growth is partially driven by global lockdown conditions which has generally boosted the revenues of software companies, but is also due to the company’s recent product growth with the addition of cloud payments and marketing data solutions.
Slack has also benefited from the work-at-home economic shift, with revenues growing by 39% year-on-year in the third quarter of 2020. However, Slack’s growth lags significantly behind other software developers such as Zoom, which grew 366% year-on-year for the same period. Founded in 2009 as a game developer under the name Tiny Speck, the company launched its widely successful real-time collaboration application in 2013 and has become one of the hottest software companies in the last decade, changing its name to Slack in the process. The company went public in 2019 at a market cap of $19.5 billion, but has seen its valuation drop by 40% by the beginning of 2020 due to lackluster earnings.
Being the largest deal in the company’s history, Salesforce hopes that the integration of Slack’s collaboration software onto its cloud platform would allow the tech giant to expand its focus from customer-facing products and into the growing market for employee collaboration. Slack seems to be Salesforce’s next piece of the puzzle in creating a more social and collaborative enterprise cloud platform, which CEO Mark Benioff called “the interface to everything”. Furthermore, it is hoped that both firms will be able to explore the potential opportunities that stem from integrating internal and customer communications onto one platform.
This will not be Salesforce’s first attempt at entering the employee collaboration market, as in 2009 the company launched Chatter, a real-time communications product similar to that of Slack. However, Chatter saw limited success and has since been transformed into a broader online community software named Community Cloud. Salesforce’s previous $750 million acquisition of Quip, a document-sharing service provider, was also aligned with its vision of a more collaborative enterprise platform.
Salesforce hopes that this deal will help the company in maintaining an annual growth rate of above 20% to reach its ambitious target of $28 billion in annual revenue by 2023. The company also has a goal of reaching a market cap of $1 trillion, which will bring the cloud developer closer to catching up with its main competitor, Microsoft.
Slack, on the other hand, will benefit from exposure to Salesforce’s range of enterprise customers. The software developer has been fighting a losing battle against Microsoft Teams, which has also received a boost from the pandemic. With the added might of Salesforce’s enterprise customers, Slack hopes to expand its presence and begin targeting companies undergoing digital transformation.
Insights and outlook
It is clear that this merger, involving two parties in Salesforce and Slack, was in fact motivated by the success of a third party: Microsoft. In combining Salesforce’s comprehensive CRM platform with Slack’s intuitive collaboration software, both parties aim to cut down the sizeable lead that Microsoft has taken in the industry. Microsoft, which offers a CRM product similar to the one offered by Salesforce, has had a strong financial year. The company recorded an annual revenue of over $143 billion USD, dwarfing that of Salesforce. Meanwhile, Microsoft Teams has proved to be tough competition for Slack, being the more popular collaboration platform despite Slack’s effort to integrate with products such as Zoom, Splunk and Jira. An advantage previously held by Microsoft Teams was that it could grow using Microsoft’s existing enterprise footprint. The playing field is considerably more level now as Slack will be able to target a larger market through access to Salesforce’s enterprise customers.
While Salesforce has plans to grow through acquisition, the dive in its stock value represents a remarkable case of value destruction. Even when factoring in Slack’s stock price increase, the merger has led to a $25 billion USD loss in value of both companies combined. While it is not uncommon for the stock of the acquiring firm in a merger to drop slightly upon announcement of a merger, this level of value destruction indicates that investors are very unhappy with the transaction. To put things into perspective, Microsoft’s acquisition of LinkedIn led to a relatively inconsequential loss of $2.3 billion in the company’s market cap. The general sentiment is that the acquisition price, which amounts to 26 times Slack’s forward sales, is grossly overvalued.
Salesforce is trying to play the long game and will aim to weather the storm of short-term devaluation. The success of the firm looking forward will depend on its ability to successfully utilise the capabilities of Slack to justify its monstrous price tag.