Salesforce Reportedly Fielding Takeover Offers

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Leading cloud computing vendor Salesforce.com (NYSE: CRM) is fielding takeover inquiries from potential suitors, according to Bloomberg. [1] The process seems to be in an initial stage and may not lead to a deal, and the identity of the potential acquirers has not been disclosed. Salesforce’s biggest rival, Oracle Corp. (NYSE: ORCL) was widely considered to be the most likely suitor, but subsequent reports claim that it is currently not in play. [2]

Following reports of a possible takeover, Salesforce’s shares shot up by 17% in intra-day trading to reach an all-time high of $78.46. Its shares closed at $74.65 on April 29th, a gain of 12% in a single day. Salesforce now has a market capitalization of $49 billion, a size which very few companies will have the resources and capacity to absorb. With Oracle out of play, other likely potential acquirers of Salesforce could be Microsoft (NYSE: MSFT) and IBM (NYSE: IBM).

If a takeover of Salesforce does come to occur, it would be the largest acquisition of a software company in history. [1] Since only a global behemoth will have the resources for an acquisition of this size, such a transaction could create a cloud computing powerhouse that could make matters immensely difficult for relatively smaller cloud vendors like SAP SE (NYSE: SAP).

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We have a price estimate of $60 for Salesforce.com, which is about 20% lower than its current market price.

See our complete analysis for Salesforce.com here

Microsoft: The Most Likely Candidate

With Oracle out of the picture, Microsoft is the next most plausible suitor for Salesforce. Microsoft and Salesforce compete directly in the customer relationship management (CRM) cloud-based software market. However, the two companies also entered into a partnership last year for integrating Salesforce’s CRM apps with Microsoft’s Windows and Windows Phone operating systems. [3] This partnership may have paved the way for a smooth integration of the two companies’ products if Microsoft were to acquire Salesforce.

However, given the significant overlap of Microsoft and Salesforce in the CRM market, the FTC (Federal Trade Commission) or DOJ (Department 0f Justice) could pose an insurmountable roadblock to the acquisition. But if such a deal does come to fruition, it could create a cloud computing behemoth that Oracle will find exceedingly tough to compete with. It should be noted that Microsoft current has cash reserves (net of debt) of $71 billion, which gives it sufficient firepower for an acquisition of this scale.

IBM: Unlikely but Plausible

IBM specializes in applications aimed at specific industries and there isn’t substantial overlap between the products offered by IBM and Salesforce. Thus, a potential acquisition of Salesforce could expand IBM’s software business and solidify the latter’s positioning in the cloud computing market. IBM has made it clear that it sees cloud computing as a major revenue stream in the future.

In February this year, IBM announced that it will invest $4 billion in its cloud services and aims to derive annual revenues of $40 billion from this segment by 2018. [4] Instead of growing its cloud business organically, IBM seems to have adopted an acquisitive route for achieving this goal. It has already spent $2 billion for purchasing SoftLayer, which brought its combined annual revenue from cloud services and applications to $7 billion. However, IBM currently has cash and cash equivalents of $8.8 billion and an acquisition of the size of Salesforce could strain its Balance Sheet heavily.

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Notes:
  1. Salesforce Said to Work With Bankers to Field Inquiries, Bloomberg, April 29, 2015 [] []
  2. Oracle Is Not Courting Salesforce, BuzzFeed News, April 30, 2015 []
  3. Microsoft, Salesforce Unveil Cloud-Computing Partnership, May 30, 2014 []
  4. IBM Says Cloud, Mobile and Data Businesses Will Reach $40 Billion by 2018, Re/Code, February 26, 2015 []