Software company Salesforce used a combination of stock and cash to acquire Slack for nearly $28 billion. Bernstein Analyst Mark Moerdler joins Yahoo Finance Live to discuss.
- Welcome back to Yahoo Finance Live. I want to bring your attention to shares in Salesforce and Slack right now. Both companies in the red today after Salesforce officially announced it would be buying out the workplace chat company for more than $27 billion in cash and stock deal. It's the largest acquisition for Salesforce ever. Both companies also delivered respective results in their latest quarters that topped expectations.
But investors seem to be skeptical of the pairing. Yahoo Finance's Julia La Roche caught up with Salesforce CEO Marc Benioff right after it was announced. Here's why Benioff says it's a marriage made in heaven. Take a listen.
MARC BENIOFF: Well, you're right Julia, this is one of the most exciting stories I've ever heard. And this story is a story of two companies coming together and it's a 1 plus 1 equals 3 equation. This is Salesforce and Slack. It's really a marriage made in heaven.
And I'll tell you, we've had for a long time a vision in our company called the "Social Enterprise" where we saw a tremendous social interface on top of our products would make our users much more productive and work from anywhere and on their phones, and on their iPads, and on their desktops. And that's exactly what I saw.
- So is it really a marriage built to last or just a desperate bid to be betrothed? By the power vested in me, let's bring in Bernstein analyst Mark Moerdler here for more on this. And a couple of things to start with here Mark, one being the peculiar move by Salesforce to include Slack's business in its latest guidance before the deal is closed. You pointed that out as a bit strange here. But could that be revealing why maybe Benioff wanted to bid for Salesforce? And what does that signal to you?
MARK MOERDLER: So, it's a great question. It is a little unusual. The deal hasn't yet been approved by the Slack investors, hasn't gone through the regulators yet at this point. They also included another smaller acquisition they were making of a professional services company also that will close in the second quarter of next year.
The thing is, if you take those two acquisitions out, they're guiding to revenue growth of roughly 17.2% for next year. And while they'll probably beat that growth rate-- organic growth rate-- of 17.2%. The Salesforce story has always been about growing greater than 20% year on year. And I think many investors had been looking and expecting that next year organic growth would be 20% or better. And so quite obviously, as we had written earlier in this year, we thought it was highly possible that Salesforce was going to need to make a big acquisition in order to bolster up revenue and to buy something that would be new and interesting and sexy to help drive the story.
- You know when you look at the concerns around Slack, the concern has been that their growth rate simply hasn't lived up to the expectation, or at least potential, of the platform. We heard Marc Benioff in that interview say that 90% of Slack customers are already Salesforce customers. So I mean, on the one hand, the merger seems to make sense for their integration. But how do you grow that platform if you've already got a 90% overlap?
MARK MOERDLER: Well, so it's 90% of Slack's enterprise customers are Salesforce customers. It's a tiny fraction of Salesforce customers as Slack customers. And so there's multiple reasons why this acquisition could have occurred. One would be that Salesforce is going to do what they did with Tableau and MuleSoft and they're going to massively invest in sales and marketing and cross-selling. And they'll drive acceleration to growth. And that will sustain the growth rate, which as you said, has been decelerating reasonably quickly, or maybe even accelerate that growth rate.
The second thing Marc Benioff talked about is it's going to become the front end to Salesforce products. If that's correct, then I'm not sure how they monetize this opportunity. And therefore, it's a very expensive acquisition for a new front end and added functionality.
The third is that they hope that one day Slack could be the front end to every application you would ever use. But I find that hard to believe that software companies are going to give up the ability to define how their user experiences and rather use Slack, as I find it hard to believe, all those integrations would be created. And the last opportunity was Salesforce has made multiple acquisitions and organic development of products within the collaboration space. They built Chatter, they built Chatterbox, they acquired Quip. And the founder of Quip is now the president and CEO of Salesforce.
Maybe what they want to do is extend on what Slack was doing. And that is go greater to war with Microsoft either in the collaboration space or even in the bigger office space. There's no way of really knowing, but all of those are very difficult monetization strategies.
- Yeah, Mark, I mean, you're talking about the price that Salesforce paid here-- $27.7 billion. It's the most expensive-- the largest deal that we've seen Salesforce make here in terms of what they're getting. But a lot of people might point out that Slack kind of flopped. I mean in terms of the anticipation of it coming out, and where it went, and the growth rate, I mean, to you, does it kind of signal more of an out in a successful exit for Slack than it does appear to be shaping up as a successful acquisition for Salesforce?
MARK MOERDLER: I do see it's a successful exit for Slack. The aspirations by investors was that this was going to be a huge business. And we really haven't seen that. The revenue growth has decelerated. They've driven margin improvement by massively giving stock-based comp. Because organically the margins have improved that lot, they've been burning cash and they've had an increasingly strong competitor from Microsoft Teams, which by the way, is given away for free.
And so I think from an investor point of view, Slack really hasn't delivered. The stock has been basically trading around or below what it went public-- I think they did a direct public listing on an IPO-- but what it went public at. And so from an investor point of view, there really hasn't been the aspirational expectations delivered.
And so from their point of view, this is a great exit. They're getting a 50% plus lift to what it was trading at prior to the news coming out last Wednesday that this could be possible. From a Salesforce point of view, you're right, it's an expensive acquisition. It's going to be negative to margins. It's going to create shared dilution because it's a cash plus stock deal. It's a big debt increase. And the stock-based comp that Slack has is going to impact and increase the amount of stock based that Salesforce is going to get.
So you have to believe this is going to be a big business to make this make sense. And I'm a little more concerned about that possibility.
- Well, we will be watching the integration very closely there. Mark Moerdler, Bernstein analyst, it's great to talk to you today. I appreciate your time.
MARK MOERDLER: My pleasure. Thank you.