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Why Salesforce buying Slack for $27.7 billion isn't a shock

Brian Sozzi
·Editor-at-Large
·4 min read

Salesforce (CRM) is getting some big work done before year-end.

The CRM giant said Tuesday after market close that it would acquire Slack (WORK) in a cash and stock deal valuing the workplace communications service at $27.7 billion.

"Stewart [Slack CEO Stewart Butterfield] and his team have built one of the most beloved platforms in enterprise software history, with an incredible ecosystem around it,” said Marc Benioff, Salesforce chairman and CEO. “This is a match made in heaven. Together, Salesforce and Slack will shape the future of enterprise software and transform the way everyone works in the all-digital, work-from-anywhere world. I’m thrilled to welcome Slack to the Salesforce Ohana once the transaction closes.”

“Salesforce started the cloud revolution, and two decades later, we are still tapping into all the possibilities it offers to transform the way we work. The opportunity we see together is massive,” Slack co-founder and CEO Stewart Butterfield said. “As software plays a more and more critical role in the performance of every organization, we share a vision of reduced complexity, increased power and flexibility, and ultimately a greater degree of alignment and organizational agility. Personally, I believe this is the most strategic combination in the history of software, and I can’t wait to get going.”

The tie-up between the two is hardly a surprise.

Slack shares have had a chilly reception to its past two earnings reports, so Salesforce swooping in at more attractive valuations makes sense.

But to watchers of the Slack story in 2020, it’s one that has left bullish investors wanting for more amid the rampant shift to work from home during COVID-19.

First, the company has seen a cooling in its closely watched calculated billings growth. Slack has blamed the slowdown on some of its small business customers being hurt by COVID-19. The company has loosened contract structures and extended credits to help them out. But the slowdown has only fed angst on the Street that Microsoft (MSFT) Teams’ ascent is weighing on Slack’s growth potential.

Teams now has more than 115 million users while Slack has a fraction of that, despite it having the edge in the minds of most in terms of user interface.

“The lurking competitive issue for Slack in our opinion remains the stalwart out of Redmond. To this point, we believe the company will have significant difficulty further penetrating the core enterprise market and Microsoft installed base given the significant competitive offering from Microsoft's Teams product that could slow growth going forward quicker than the Street is anticipating, despite the COVID driven tailwinds,” warned Wedbush tech analyst Dan Ives.

PARIS, FRANCE - FEBRUARY 06: In this photo illustration, the Slack logo is displayed on the screen of an Apple iPhone in front of a computer screen displaying a Slack logo on February 06, 2019 in Paris, France. Slack announced in a statement that it had "confidentially" filed its file with the SEC for an IPO. Launched in 2014 in San Francisco, the US Enterprise Messaging boasts 10 million daily active users in more than 150 countries worldwide. (Photo by Chesnot/Getty Images)
PARIS, FRANCE - FEBRUARY 06: In this photo illustration, the Slack logo is displayed on the screen of an Apple iPhone in front of a computer screen displaying a Slack logo on February 06, 2019 in Paris, France. Slack announced in a statement that it had "confidentially" filed its file with the SEC for an IPO. Launched in 2014 in San Francisco, the US Enterprise Messaging boasts 10 million daily active users in more than 150 countries worldwide. (Photo by Chesnot/Getty Images)

Meantime, despite impressive growth this year in paid customers amidst the pandemic — notably among large corporations — and a host of new innovations to retain existing clients, Slack still expects to post a net loss this fiscal year. It’s unclear when Slack will turn a profit, which is something that has weighed on the minds of Wall Street in recent months.

From their late May high for the year to just before the deal speculation, Slack shares were down 25%.

Slack joining forces with a beast like Salesforce would address a lot of these issues, rather quickly.

Salesforce could help easily scale up Slack to more high-paying corporate customers in a major challenge to the momentum at Teams. That alone would bring Slack likely to the doorstep of a sustainably profitable business. All of the sweeteners of being under the Salesforce umbrella would only strengthen the profit potential of the communications platform.

An earlier version of this article was originally published on November 25, 2020.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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