14 BARRON’S December 7, 2020
S
alesforce.comhelped bring soft-
ware into the cloud era, and now the
company is once again trying to
leave its mark. In agreeing to buy
Slack Technologiesfor nearly $28 billion
in cash and stock, Salesforce is making one
of the priciest deals in tech history—and
investors aren’t thrilled.
Salesforce has lost about 15% of its
value, roughly $37 billion, since Nov. 25,
when The Wall Street Journal first re-
ported that Salesforce (ticker: CRM) and
Slack (WORK) were in merger talks.
Analysts expect Slack to generate $
million in revenue this fiscal year, which
means Salesforce is paying more than 30
times sales for the communications plat-
form. That’s a hefty price tag when you
considerIBM(IBM) paidonly10 times
sales for Red Hat, an open source software
firm, in 2018. That deal came to $34 billion
and remains the largest in software history.
Barron’slaid out a long-term bullish
case for Slack in June 2019, shortly before
the company went public through a direct
listing. Slack’s first-ever trade came at
$38.50, but the stock was below $30 when
the Journal reported Salesforce’s interest.
Ultimately, Salesforce is paying $45 for
every Slack share, meaning early investors
made a decent, though not great, return.
For Salesforce shareholders, the payoff
is a bit less clear. Slack had sales of $
million in its just-reported third quarter,
up 39% from a year ago, and it reported
one penny a share in adjusted profit, its
first profitable quarter. But Slack is no-
where near sustained profitability. Slack’s
growth has been slowed by intense compe-
tition fromMicrosoft(MSFT), which
bundles its rival Teams software with the
Office 365 productivity suite, effectively
giving it away free.
Salesforce thinks it can rev up Slack’s
growth by plugging the communications
service into its own software suite, which
ACloudyForecastfor
SalesforceandSlack
is used by a devoted set of corporate sales
teams. The deal comes at a substantial
cost, though, including about $16 billion in
cash. That’s far more than Salesforce has
on hand, so the company plans to lever up.
For the deal to make sense, one has to
believe Slack truly transforms Salesforce,
giving the company access to new catego-
ries and an improved competitive position
against Microsoft, which has its own set of
sales tools.
Salesforce’s chief operating officer, Brett
Taylor, toldBarron’sthat the transaction
comes as digitization of the economy is
accelerating. “The world after Covid will
be a lot different than it was in 2019,” he
says. “It changes what it means to grow
your business, to sell from anywhere, to
provide customer service from anywhere.”
Slack, he says,offers Salesforce a unique
opportunity to “navigate the new normal.”
“Slack was the first company I ever saw
that really defined a new way of working,”
Taylor says. “It’s a transformational deal.
This will be one for the history books.”
Slack CEO and co-founder Stewart But-
terfield will continue to run the company
as a stand-alone business. He’s no small
asset. The serial entrepreneur has built
multiple companies, including the photo
site Flickr, which was sold to Yahoo! for
$25 million in 2005. Butterfield is among
the most respected CEOs in cloud software
and at 47 is almost a decade younger than
Salesforce CEO Marc Benioff. It’s possible
Salesforce has found itself Benioff’s suc-
cessor.
And yet, investors are disgruntled. Citi
analyst Walter Pritchard cut his rating on
Salesforce to Neutral from Buy after the
deal was announced. He thinks Salesforce
could have simplyteamed up with Slack,
rather than spending so much on a com-
pany facing intense competition. He also
thinks the deal raises questions about
Salesforce’s own growth outlook. Prit-
chard’s bottom line: “We don’t think Sales-
force needed to buy this.”B
By ERIC J. SAVITZ
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