By Demi Akinjide, Saihejpal Ailwadhi, Ben Fobel, Zac Greenberg, Will Sergent (University of Bristol), Sally Marshall, Max Raso, Valeriya Shreyber, Izer Onadim (Imperial College London)
Overview of the deal
Implied Equity Value: XXX
Total Transaction Size: $27.7 billion
Closed date: July 2021 (expected date)
Target advisor: Qatalyst Partners LP and Goldman Sach & Co LLC
Acquirer advisor: Bank of America
Salesforce (NYSE:CRM) and Slack Technologies (NYSE: WORK) established a definitive agreement enabling the acquisition of Slack. Subsequent to this agreement, shareholders of Slack earned $26.79 in cash and 0.0776 shares of Salesforce common stock for each share of Slack - providing a combined $45.86 a share. The acquisition would happen at a 55% premium to the company’s equity. It appears to be confirmed that Salesforce will finance its cash through a series of current cash on hand and new debt; given this, they were provided a 364 day $10 billion bridge loan through J.P.Morgan Chase, Citigroup and Bank of America — indicating the commitment received from this deal.
“Slack changes everything and makes Salesforce a whole new type of company” - Salesforce CEO Marc Benioff
Company Details: Acquirer – Salesforce
Salesforce is a cloud-based software company. It provides a customer relationship management service and sells a complementary suite of enterprise applications focused on customer service, marketing automation, analytics and application development.
Founded in 1999, headquartered in San Francisco, United States
CEO: Marc Benioff
Number of employees: 49,000 (2020)
Market Cap: $204.26B (as of 03/12/2020)
LTM Revenue: $17.1Bn
LTM EBITDA: $2.52B
LTM EV/Revenue: 12.64x
LTM EV/EBITDA: 85.79x
Company Details: Target - Slack Technologies, Inc.
Slack Technologies is an international software company. The software Slack itself is a channel-based messaging platform. With Slack, people can work together more effectively, connect all their software tools, and find the information that they need.
Founded in 2009, headquartered in San Francisco, United States
CEO: Stewart Butterfield
Number of employees: 1664 (2019)
Market Cap: $24.65B (as of 03/12/2020)
LTM Revenue: $0.63B
LTM EBITDA: $-0.555B
LTM EV/Revenue: 28.6x
LTM EV/EBITDA: -43.82x
Projections and Assumptions
In September, Slack reported they had over 130,000 paid customers, up 30% from the previous year. Despite this, the company hasn’t turned a profit since its IPO last year. However, the rapid growth Slack saw in its initial years appears to be slowing down, and it has seen a more muted benefit from the rapid shift to remote work during the COVID-19 outbreak than other software vendors. An acquisition by an industry titan like Salesforce could help accelerate Slack’s user growth, and it opens up massive opportunities for cross-selling and packaging products. Salesforce CEO Mark Benioff has plans to expand Slack in the enterprise space by combining and integrating the companies’ capabilities and leveraging new data. Currently, 90% of Slack’s enterprise customers are also Salesforce customers, meaning this will be an area of focus for Salesforce going forwards.
In the long run, Salesforce wants to be at the forefront of enterprise software and become the largest player in the digital, remote-working world. A key benefit for both parties would be bolstering competition with Microsoft, which sells a rival CRM platform to Salesforce and generated over $25 billion in revenue from commercial customers in the past year. Since launching Teams, a channel-messaging software with similar capabilities to Slack, in 2017, Microsoft has invested heavily in its collaboration platform. Teams is currently available at no extra cost to those with Microsoft Office 365 subscriptions, a major competitive threat to Slack due to the widespread use of MS Office. The competitor platform has 115 million daily active users and is rapidly developing an extensive breadth of features very similar to Slack, giving it a large footprint among enterprise users. With Salesforce’s backing, Slack will be far less vulnerable to Microsoft’s price-gouging strategy.
Salesforce has been building on its success in recent years to diversify into other fields, mainly through a series of acquisitions. Last year, the company bought data analytics specialist Tableau Software for $15.7bn, and previously bought Mulesoft, a software company that connects different systems, for $6.5bn. Benioff has aggressively pursued his vision of assembling an enterprise software titan, largely through M&A activity, and the acquisition of Slack goes a long way towards achieving that vision.
Risks and Uncertainties
Salesforce’s acquisition of Slack looks to capitalise on the recent growth in remote working during the pandemic which has illustrated the importance of work-related messaging tools. Though this deal boosts Salesforce’s ability to compete with Microsoft, it does so at a cost. At a valuation of around 25 times next year’s expected revenue, the purchase price is by no means a bargain. In a highly competitive market, where Slack has been unable to turn a profit despite 2020’s boom in cloud software, this valuation presents significant risk that Salesforce will not recoup costs and overpaid for Slack.
More broadly, a major concern regarding the acquisition is the lack of synergies Slack has with Salesforce’s core business. Salesforce has made a number of successful acquisitions in the past few years, namely the purchase of Demandware for $2.8 billion in 2016 and Tableau Software’s data analytics last year. While these businesses have clear synergies with Salesforce relating sales and marketing, Slack’s integration into Salesforce’s business model is more difficult to rationalise, mainly given that Slack has a significantly broader appeal when compared with Salesforce’s specialised management products. Thus, Salesforce’s ability to utilise Slack’s service for its own business, while also competing with the likes of Teams and Zoom, which have larger market shares in the industry, is an inherent risk with the acquisition.