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Breakingviews - Salesforce skins Slack deal with revenue synergies

Smartphone with Slack logo stands in a shopping cart on a keyboard in front of displayed Salesforce logo in this picture illustration taken December 1, 2020. REUTERS/Dado Ruvic/Illustration

NEW YORK (Reuters Breakingviews) - Salesforce.com’s deal for Slack Technologies dredges up an old merger justification that often causes problems. While many companies use cost cuts to launch takeovers, the $27.7 billion offer that Marc Benioff’s firm has made for Slack may be more about revenue synergies.

Salesforce sells software that helps salespeople be more productive and Benioff has repeatedly bought companies to add useful functions. Layering on a service that allows people to collaborate online – like the one that Slack sells – makes logical sense, especially as lockdowns have accelerated the growth of both people and teams working remotely. As Benioff put it repeatedly on Tuesday’s call, Slack will be the user interface running on top of Salesforce’s software channels.

The trouble, as in any acquisition, is justifying the price. Slack loses money now, but Salesforce is paying for what it could become. The company is currently growing revenue about 50% annually and should have almost $1.1 billion in the next 12 months according to analyst estimates from Refinitiv. Meantime Salesforce grows quickly too, but less than half the rate of Slack.

Slack’s multiple reflects this. Salesforce is paying about 26 times its estimated revenue versus Salesforce’s roughly 9 times. It suggests that Salesforce needs to turn every dollar that Slack makes into three to justify the difference in valuation, or put another way, it would have to add a bit over $3 billion to the purchaser’s top line, or about 13% of estimated revenue of $23.8 billion over time – or prevent it from disappearing – for the acquisition to be a good idea.

That can be either about growth or defense. Microsoft has been heavily pushing Teams, its alternative to Slack. Chief Executive Satya Nadella mentioned in the last earnings call that Teams was driving increased usage of other Microsoft software, including products that compete directly with Salesforce. So its success suggests Salesforce could cross-sell or upsell its products, too, reaching the ever-elusive revenue synergies that companies often try to attain.

But it could also simply be about stopping any future business from migrating over to Microsoft, which is harder for shareholders to see, and Benioff to explain, some three years down the line. Investors have knocked off more than $30 billion off Salesforce’s market capitalization since news of talks emerged. Benioff could be an exception, but if broader merger history is any guide, it suggests they’re rightly taking a skeptical view.

Breakingviews

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