Much like Portfolio Managers pursued Technology stocks at nosebleed valuations in an effort to chase performance this year, Salesforce.com is pursuing richly-valued M&A targets (Slack), as it chases the Enterprise Software market leader – Microsoft.
Years ago Salesforce (tkr: CRM) realized it needed to expand its product portfolio beyond CRM products. The company’s AppExchange was one such initiative. More recently Salesforce acquired Analytics company Tableau for $15.7 billion.
Down the street from Salesforce Tower Slack Technologies (tkr: WORK) worked to establish itself in the secure messaging/ collaboration space. Count us among those who did not buy into the undifferentiated value proposition of horizontal content management companies such as Slack, Dropbox (tkr: DBX) and Box (tkr: BOX), given Microsoft’s (tkr: MSFT) bear hug on the space and Google’s (tkr: GOOG) growing presence. If you plan to compete with a horizontal product offering, your offering better be significantly cheaper, better or faster. If not, you would do well to have first mover advantage (Note: by “horizontal offering” we refer to software product categories whereby the core elements of a given vendor’s products are essentially the same regardless of customer organization or industry vertical. Customer Relationship Management (“CRM”) software is one such software product category. Content Management is another).
Slack went public in 2019 at a $23 billion valuation and generates a modest Operating Cash Flow margin of 7%. Slack’s current EV of $22 billion is a 440x multiple on forward Operating Cash Flow and a 25x multiple on run rate Revenue. More recently the company has preferred to fight its battles with Microsoft in court rather than on the playing field. Slack simply does not have the balance sheet to compete with Microsoft Teams. A potential tie up with Salesforce as reported by the Wall Street Journal makes sense for Slack. We do not believe it makes sense for Salesforce. Salesforce is hell bent on competing with Microsoft. The two companies competed for LinkedIn in 2016 before Microsoft won that deal process.
Our preference would be for Salesforce to make vertical acquisitions that could deepen its ties to various industries such as Healthcare, Financial Services, Energy, Insurance and Technology. Should Salesforce feel passionately about Collaboration software, why not pursue Atlassian (tkr: TEAM), the leader in Collaboration tools for Software developers, engineers and architects? Cerner (tkr: CERN) in Healthcare and Verisk (tkr: VRSK) within Financial Services and Insurance would also be interesting M&A candidates but perhaps not the best cultural fit. Zoom Video (tkr: ZM) would be an interesting counter to Microsoft Teams should ZM’s valuation come back to earth end of this year or early 2021. Zoom Info (tkr: ZI) is a smaller version of LinkedIn. ZI lacks LinkedIn’s social element but has entity/people data.