Who would be the best acquirer of Salesforce.com?
April 29, 2015
I’ll leave it to the financial analysts to proselytize on the possibility of one or other of the five likeliest acquirers – SAP, Oracle, Microsoft, IBM or HP, in reverse alphabetical order – entering the bidding and pulling off the largest software company acquisition ever. At today’s increased valuation of around $50bn., there aren’t many companies that could pull this one off successfully from a financial point of view, let alone whether they could digest the business, the organization, and its ecosystem successfully.
Some analysts have mentioned Google and Cisco as potential suitors. For the former, I see this as a bridge too far from nay perspectives, especially strategic ones, and Cisco may be a possibility but to my mind only a very dark horse. While Google’s business model is “ultra” volume-operations – still overwhelmingly B2C and ad-centric into the bargain – Cisco might want very badly to become a relevant player in cloud for B2B and enterprise, but has almost no software-company DNA. So my group is limited to the above five companies.
My purpose here is limited to identifying strategically which company would make the best match, and which one would make the least attractive one. To be clear, no one except the parties involved has any idea whether this will turn into an actual transaction, a dry run, a head fake, or just an auction without an eventually successful bidder. But an auction it will undoubtedly be. Let’s handicap this race using two initial criteria: 1) which of the five companies needs it most, and 2) which one would know best what to do with it.
Before ending this article, I’ll touch on the issue of a reverse merger as one very interesting and even feasible outcome.
Here’s my ranking of the five most likely bidders, some of whom might not be enticed into the auction, or might drop out in the early rounds. At minimum, I am pretty certain that at least 2-3 of these companies will enter the bidding. The ranking below starts with the least likely winner, leading up to the most likely one.
Arguably needs a Salesforce.com quality acquisition most in order to become a player in cloud computing, but would know least what to do with it. HP’s track record in leveraging its software acquisitions is, to put it mildly, unimpressive (and in some cases, purely wasteful). In any case, HP has very little intimacy with application software (SaaS in this case) because virtually all of its organic or acquired software assets are of the infrastructure/middleware variety. In sum, lots of need, but very little DNA or managerial capability to leverage the acquired business despite its ongoing split into two separate companies.
Needs a Salesforce.com the second-most, and based on its acquisition track record would be the second or third least able to know what to do with it. IBM has explicitly focused on infrastructure and middleware software and stayed well clear of application software, preferring to partner with such companies in order to grow its services business, which today badly needs a new growth engine. Though it’s not clear how traditional systems integrators will discover how to grow their services engagements without developing new service competencies based on leveraging customer/user engagement, you would have to back IBM to achieve this quicker than any other of the five. Except possibly for Oracle, which has a considerable professional services organization of its own.
Needs Salesforce the third-most in order to complement its gorilla franchise in on-premise ERP and supply chain management with a market-leading cloud-based CRM suite. This would help the company to reinvigorate its claim to be the reference vendor for run-the-business applications, even though it still has weak cloud ERP offerings besides the Successfactors HR suite. Based on its track record in taking quite a while to manage and integrate prior significant acquisitions such as Business Objects, Sybase and Successfactors itself, I would have serious reservations about its ability to execute – in other words, to know what to do with it. That said, in pure strategic terms, SAP has established a very powerful application software franchise, especially among enterprise and mid-sized customer organizations, so I would see it being in a position to position itself effectively in these market segments.
Needs Salesforce the third-most in order to add pizzazz to its application software portfolio with a powerful cloud CRM offering, and would know second-best what to do with it – in particular the volume operations SMB part of Salesforce’s portfolio. That said, I would have real concerns about Microsoft’s ability to digest and manage the fast-growing enterprise business that Salesforce has been cultivating during the past five or six years. As for the other part of Salesforce’s portfolio consisting of a range of Paas and analytics offerings including Force.com PaaS, Data.com and others,these would be very attractive to a Satya Nadella-led Microsoft which a few days ago announced its intention to triple its cloud-related revenues to $20bn. a year by mid-2018. Microsoft is determined to leverage its Azure Iaas and Office 365 Saas services to become an infrastructure-platform-application goliath, designed to overtake AWS and Google as the reference vendor for enterprise and SMB customers. Looked at from this broad perspective, Microsoft surges into serious contention.
Needs Salesforce the second-most, tied with IBM, and would know best of all five companies what to do with it. Not only is Salesforce’s DNA in part a direct derivation of the Oracle DNA established by Larry Ellison, but Oracle knows how to integrate acquired software businesses better than most, and Salesforce’s back-office systems all run on Oracle’s database and ERP software. Furthermore, like SAP, Oracle is familiar with marketing, selling, implementing, and supporting complex applications for enterprise customers, which is the direction that Salesforce has been emphasizing for several years, building up its customer base and executive talent pool accordingly.
In summary, the obvious choice is Oracle by a nose, based on the combined criteria of need vs. knowing what to do with the acquired organization and business, with Microsoft in second place, IBM in third, SAP in fourth (just slightly), and HP a non-starter.
As for the idea of a reverse merger, these transactions can take many forms, one of which is where the acquired company provides the bulk of the newly merged organization’s talent and, especially, senior management, leaving the “acquirer” to provide the global organization that will help to accelerate expansion of the acquired company’s business. If IBM or HP were to acquire Salesforce, I would expect the dynamics of a reverse merger to influence the transaction. For one thing, HP’s market cap of $60bn or so is not much higher than Salesforce’s, though the complexity of running the global systems business is far greater.
Although IBM could more easily afford and digest a company of Salesforce’s size, like HP it does not have a surfeit of talented cloud-seasoned executives and professionals, and badly needs an injection of new blood in the senior team and the board. Assuming that IBM had the humility to make Salesforce its crown jewel in cloud computing and put Salesforce’s best executives in senior roles, I could see it providing a more enticing combination of “Need and Can Execute” than Oracle.
Though all things considered Oracle seems to me and many others to be the most logical acquirer, what no one can foresee are the possible ego-related issues that enter many M&A discussions and could prevent this deal from happening. Ellison is known for operating with somewhat of a win-lose or even hostile mindset in some cases, notably in the long-running hostile takeover of Peoplesoft several years ago, and he may want to put Benioff in his place. But the two executives also nurture a grudging admiration for each other from their successful earlier working relationship when Benioff was a fast-rising star at Oracle, and Ellison was an early investor in Salesforce.com.
By way of a brief comment on the practicalities of this opportunity for each of the five, HP is the company that can least afford this transaction in pure financial terms, and Microsoft can most easily afford it in the same financial terms, from a perspective of trading in its own stock and/or using a portion of its hoard of cash. However, nothing that I’ve said so far incorporates the idea of major PE firms getting involved, which could change the complexion of the bidding as well as the eventual outcome.
If Oracle turns out to be the successful acquirer of Salesforce.com, the company’s position as a presumed or actual leader in cloud computing, particularly Saas, would undoubtedly improve dramatically.
In light of the recent approchement between Nadella and Benioff, seen together at various industry events, and with a recent alliance signed between the two companies, Microsoft might have become the actual favorite to win the bidding. Furthermore, as reported by BuzzFeed’s John Paczkowski (formerly with Re/code), Oracle hasn’t yet made any move to acquire Salesforce, though this could rapidly change as I cannot see Ellison resisting the temptation to beat Microsoft to a trophy that he probably considers to be naturally his to win.