CRM market leader Salesforce.com (NYSE:CRM) is acquiring cloud marketing company ExactTarget for a whopping $2.5 billion.  The announcement of the biggest ever acquisition by Salesforce comes as the company is positioning itself to ride the social media marketing spend wave.
Marketing spend through social media is expected to constitute a significant part of companies’ marketing budgets going forward. Salesforce has beefed up its Marketing Cloud portfolio by acquiring Buddy Media and Radian6 in the last two years and launched a new Twitter ad platform to use Twitter’s advertising application programming interface (API). While we expect Marketing Cloud to be a key growth factor for Salesforce in the coming years, the steeply priced acquisition will weigh on Salesforce’s under stress operating margins in the near term. Below we discuss our view of the acquisition and its impact on Salesforce.
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Social Media Marketing Is Seeing Rapid Growth
The spurt in consumer and business use of social networks, mobile devices, and new digital technologies is leading a revolution in marketing spend. Social media campaigns are becoming an increasingly important aspect in brand building and awareness. Marketing on social media such as Facebook, Twitter and YouTube is driving technology sales as companies increasingly use tools to deliver and monitor social media campaigns. Marketing was the fastest growing CRM category in 2012, growing at 21%.  The rapid growth is expected to continue through 2017 as chief marketing officers (CMOs) are estimated to outspend chief information officers (CIOs) on technology within the next five years. According to Gartner, consumer technology companies will switch one-third of their traditional marketing budgets to digital by 2015.  Due to this huge opportunity, the social media space has seen various acquisitions by software companies including Salesforce and Oracle as growth in their traditional businesses is slowing down.
How Does ExactTarget Fit Within Salesforce?
We believe ExactTarget is a good fit for Salesforce. ExactTarget provides Internet-based marketing software used by businesses to run ad campaigns through e-mail, social networks and mobile devices. Salesforce’s current Marketing Cloud suite includes Buddy Media, Radian6 and Social.com that enable clients to listen, engage, gain insight, publish, advertise and measure social marketing programs. However, it doesn’t have a significant presence in email marketing. ExactTarget generates most of its revenues from e-mail marketing,  and that’s how it will fill in the gap in Salesforce’s current offerings. Further, with the acquisition, Salesforce will get access to nearly 6,000 ExactTarget customers including major global brands like Coca-Cola, Gap and Nike. The move will put Salesforce at the top of social media offerings pack and allow it to capitalize on the massive opportunity.
But, Does The Acquisition Increase Shareholder Value?
While the deal will pave the way for continued revenue growth, we are skeptical if it will create any value for Salesforce’s shareholders considering the huge amount spent by the company on the acquisition. In an all cash deal, Salesforce is paying $33.75 for per share of ExactTarget, valuing the latter at $2.5 billion.  This is about 7.6 times and 6.6 times of ExactTarget’s 2012 revenues (about $292 million) and expected revenue for 2013, respectively.  The valuation is quite steep compared with the median of 1.9 times revenue in more than 70 similar deals. 
Further, ExactTarget is losing money and in 2012, it reported a cumulative net loss of $21 million.  Therefore, the acquisition will put a strain on Salesforce’s operating margin which continues to reel under soaring costs (Read Salesforce Shows Strong Growth But Soaring Costs Drag On Its Value). Salesforce’s history of managing recent acquisitions of Buddy Media and Radian6 has also not been great as it has yet to capitalize them.
The acquisition is expected to increase Salesforce’s fiscal 2014 revenue by $120-$125 million even as it will lower its adjusted EPS by about $0.16. Adjusted EPS is now expected to be $0.31-$0.33 with revenue ranging from $3.96 billion and $4 billion. The next quarter’s adjusted EPS will reduce by approximately $0.05, to $0.06 -$0.07 per share.Notes:
- Salesforce.com Signs Definitive Agreement to Acquire ExactTarget, Salesforce, June 04 2013 [↩] [↩] [↩]
- ExactTarget 10-K, SEC [↩]
- Salesforce to pay $2.5 billion for ExactTarget in social marketing bet, Yahoo, Jan 05 2013 [↩]
- Salesforce to Buy ExactTarget for About $2.5 Billion, Bloomberg, Jan 05 2013 [↩]
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