A recent Bloomberg report divulged that Salesforce.com (NYSE: CRM) has engaged an investment bank to review offers from potential acquirers. If Helen had a face that launched a thousand ships, this news has launched at least that many speculations who might interested. Salesforce is the the crown jewel of all the many enterprise software companies in the Silicon Valley, attested by the fact the tallest building ever built in San Francisco may soon be named after it. Any acquisition on this scale will have implications for not only the entire industry, but especially for Oracle Siebel.
Not only do the Salesforce and Oracle Siebel products compete head-to-head in the customer relationship management (CRM) category, the story of how Salesforce surpassed Siebel as the market leader has become a sort of David vs. Goliath legend in Valley. So many upstarts claim they are going to do to their category leader what Salesforce did to Siebel, the challenge is starting to sound routine. What happens to Salesforce in the next few months may either refute this myth or reenforce it.
Although I do not have any inside information, my intention is to weigh in here with speculation as well as analysis, because a Salesforce sales could have a huge impact the Siebel’s future direction as well as your career. No matter what, you need to take the news seriously because of two possibilities.
The Two Possibilities
The first possibility is that Salesforce has gone to the financial market looking for buyer. Although this is not the way it is positioned in the financial press, as your mother may have told you, do not believe everything you read in the papers. Salesforce may very well have initiated the conversation and management is looking to sell the company.
The second possibility is that a buyer has came to Salesforce. Given where the company is in its financial trajectory, it is hard to imagine a reasonable offer would not be accepted. Either way, my guess is Salesforce management is likely to sell if offered what they see as a fair price.
Acquisitions are driven by financials so its important to keep in mind Salesforce’s numbers. In its most recent financial report Salesforce (NYSE: CRM) reported some strong numbers:
— Quarterly Revenue of $1.44 Billion, up 26% over a year ago
— Full Year Revenue of $5.37 Billion, up 32% over the year past
— Deferred Revenue of $3.32 Billion, up 32% over a year ago
— Unbilled Deferred Revenue of Approximately $5.7 Billion, up 27% over the year past
— First Quarter Revenue Guide of $1.485 – $1.505 Billion
— Raised 2016 Revenue Guidance Range to $6.475 Billion to $6.520 Billion
These are all record results, profitability remains elusive. Since Salesforce runs at a loss, it technically does not have a price/earnings (P/E) ratio, but its 1 year forward P/E is over 600. By contrast Oracle’s is 16, and Microsoft’s is 19. Salesforce’s P/E ratio so large in fact professional investors are using different metrics, such as cash flow, to value it. As high as the price of the stock, the Bloomberg’s news of a suitor raised the price to an all time high of $74.65 a share. In an article printed in Barrons investment bank Evercore Partners expects the company to command 30% premium to its recent trading range (mid-$60s), which would put the deal in the $55 billion-$64 billion range which would make the deal the largest in financial history.
What this means for Siebel
This means that there are only a handful of companies in the world that have the cash and credit to be able to buy Salesforce at its current valuation. A short list includes the usual suspects: Oracle, Microsoft, IBM, Google, and SAP as well as some unusual suspects: Baidu or another company in China.
Oracle – The biggest implications for Siebel come if Oracle buys the company. In many ways Oracle is the most natural acquirer. Marc Benioff is the one time protege of Larry Ellison, who also was one of the first investors in the company (although he did later say he hoped his investment would go to zero). Acquisitions are a key competency for Oracle and many of the people at Salesforce once worked for Oracle, and the products are interlocked. Salesforce runs on Oracle and the companies work closely on an engineering level. In an Oracle takeover many Salesforce employees would leave, but many would stay. Standing in the way of an acquisition are politics and price. Marc Benioff in many ways is the ideal successor to an aging Larry Ellison, a fact that other pretenders to the crown are aware. Paying a premium for Salesforce may also not be palatable personally to Ellison who seems to be more interested in having other people make him rich than in making other people rich. The most important implication for Oracle Siebel is that if an acquisition happens, for antitrust reasons, Oracle might decide to divest the Siebel product line.
Microsoft – In many respects a Microsoft / Salesforce acquisition would prove the be biggest competitive threat to Oracle Siebel because it would combine the biggest cloud CRM product with the second biggest on-premise CRM product. Although Microsoft products are not as compatible with Salesforce as Oracle’s products the market it serves is similar. Microsoft has a new CEO who may be looking to make his mark. In such a case my expectations are that most Salesforce employees not let go would stay. Standing in the way of a deal is the Microsoft’s mixed record on acquisitions and the risk of the size of such a deal in a culture that is generally risk adverse.
IBM – Although Big Blue has made many successful acquisitions its size and culture is likely to distract Salesforce and could even eventually kill it. An acquisition would go against IBM’s general policy on applications and would likely result in a mass exodus of Salesforce employees most of whom would be able to find work in other companies.
Google – If Google buys Salesforce the most likely outcome is that it would leave it alone since the company has other fish to fry. My expectation is that most employees would remain with the company.
SAP – Although this makes a lot of sense from a market perspective, an acquisition would be a stretch from a financial and product perspective. Surveys indicate customers are not adopting Hana. In a additional SAP does not have a very strong record of successful acquisitions. In response to queries from the press, SAP CEO (and former Siebel exec) Bill McDermott said that the firm has “zero interest” in Salesforce.
Baidu or another company in China. Salesforce is a great company and a prestige asset similar to a Rockefeller Plaza in New York. If Salesforce were approached by a buyer, it is mostly likely to be a foreign company such as Baidu looking to get a foothold in the Silicon Valley.
Because of the price of the deal, Salesforce will have to go through a substantial round of employee rationalization depending who buys it. Administrative, legal, and overhead positions would most impacted negatively. Salesforce sales people will be welcome across the industry. Product marketing, managers and engineers would be welcomed with open arms by the venture community to roll the dice on new ventures, especially if their resumes include Siebel as well as Salesforce. Most engineers, customer support, and consultants would be retained. Salesforce data center operations people would be invaluable and are likely to be treated like gold.
Salesforce makes its earnings announcement today so hold on to your hats!
Article and image originally published on Siebel Hub.
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