Overview of the deal
Estimated value: $6.5bn
Announcement date: 21/3/2018
Acquirer Advisors: Bank of America Merrill Lynch (BAML)
Target Advisors: Goldman Sachs
Salesforce’s deal to buy Mulesoft for $6.5bn came together rapidly. The two companies started a discussion concerning a potential acquisition as late as February and Salesforce put forward their initial tender offer at $38 a share on March 2nd. Five days later, MuleSoft CEO Greg Schott came back with a counteroffer at $45 a share. Salesforce agreed and the deal was made public on March 20.
Despite speculation from analysts, regulatory documents show that Salesforce was not engaged in a bidding war for Mulesoft. The seemingly excessive price tag is rather a result of Mulesoft’s CEO, Schott, unwillingness to settle for anything less than the valuation he found to be justified given the estimation of future revenue growth.
Disclosure suggests that the board of directors at Salesforce are convinced that owning Mulesoft presents an opportunity for considerable long-term growth. In fact, Mulesoft has in a detailed analysis offered financial estimates all the way to 2037 highlighting that they expect to be around 17 times bigger by then in terms of revenue.
TechCrunch stresses Salesforce’s need for an API integration engine that would help the company to access data across organisations. This is particularly important as they are building out their AI and machine learning layer. A company like Mulesoft, with the technology it provides, will give Salesforce exactly this.
Company details (Salesforce)
Salesforce is an American cloud computing company that provides businesses with an interface for case management and task management, and a system for automatically routing and escalating important events.
- Founded in 1999, headquartered in San Francisco, USA
- President and CEO: Marc Russell Benioff
- Number of employees: 29,000
- Market Cap: $85.17bn - EV: $82.87bn
- LTM Revenue: $10.48bn - LTM EBITDA: $1.41bn
- LTM EV/Revenue: 8.02x - LTM EV/EBITDA: 84.82x
Company details (Mulesoft)
Mulesoft is an American software company that provides integration software for connecting applications, data and services. This enables businesses to connect enterprise applications on-premises and to the cloud and subsequently eliminate the need for point-to-point integration code.
- Founded in 2006, headquartered in San Francisco, USA
- President and CEO: Greg Schott
- Number of employees: 1,200
- Market Cap: $5.95bn - EV: $5.75bn
- LTM Revenue: $0.296 bn - LTM EBITDA: -$0.076 bn
- LTM EV/Revenue: 14.24x - LTM EV/EBITDA: -75.75x
Projections and assumptions
Salesforce has entered into a definitive agreement under which they will acquire Mulesoft for an enterprise value of approximately $6.5bn, or $44.89 per share. The offer will be composed of $36.00 in cash and 0.0711 shares of Salesforce stock. This share price represents a 36% premium over Mulesoft’s closing share price on March 19. Salesforce has decided to fund the deal with cash from its balance sheet and approximately $3.0bn of proceeds from a combination of term loans and issuance of debt securities.
Despite the hefty price tag, there is a sensible strategic rationale for acquisition. Looking back at recent years, Salesforce’s most dominant source of revenue has been its Sales Cloud application. However, in recent quarters this segment has suffered growth stagnation. Hence, Salesforce has relied on their Platform business in order to live up to the 20% revenue growth that the board of directors has committed to. Examining the two segments, it becomes apparent that Platform grew 37% y/y in Q4 compared to the 16% y/y growth in Sales cloud. Presumably, Mulesoft will be absorbed into a new “Cloud Integration” segment. Given a normal run rate scenario, Mulesoft is estimated to generate revenues somewhere between $400-$425 million for the upcoming fiscal year which adds about 20% in growth to the estimated revenue of Salesforce.
Moreover, the transaction equates to 16x EV/FTM revenue for MuleSoft. Other data integration software takeouts e.g. BEA Systems and Tibco were each acquired for 4.0–4.7x EV/FTM revenues. Thus, this multiple represents almost a 300% premium which sets a new mark for modern-era public software M&A multiples.
Salesforce will, with the acquisition of Mulesoft, strengthen the iPaaS aspect of its SaaS centred business model. The most notable synergy arising from the deal is Salesforce’s launch of its Salesforce Integration Cloud offering. This offering will help customers integrate their applications and extract deeper insights from their data.
The process of integrating software in corporates’ IT infrastructure is most often done by hand, making it a considerable bottleneck. This job is greatly streamlined by Salesforce’s new offering, enabled by the acquisition of Mulesoft. The extensive integration of software, currently in the works, leaves Salesforce’s new iPaaS offering with an estimated total addressable market of $32bn.
Through addressing this market, Mulesoft can contribute to Salesforce’s revenue growth. As a result of the acquisition, Salesforce has raised their estimated revenue for FY22 by $1bn to $21-$23bn. This will hopefully mitigate Salesforce’s slowdown in growth.
Apart from gaining competitive advantages in technology, the company also acquires major clients such as Coca-Cola, AT&T, and Airbus. While Salesforce already has some connections with these companies, Mulesoft gives Salesforce entry into new areas.
Although the high projected growth of Mulesoft and the potential synergy effects, the high price-tag makes it likely that it will take some time until the ROI reaches a level which supports the acquisition.
Risks and uncertainties
Since the deal received unanimous approval from the Mulesoft board and the companies have signed a definitive agreement, there is no risk of competing bids. However, the deal is still awaiting regulatory approval. Salesforce expects the deal to close during the second quarter of 2018.
As in every acquisition, there is the challenge of successfully incorporating new technology and personnel into the acquirer’s organisation. However, the business of Mulesoft is generally seen as a good fit for Salesforce’s existing business and Salesforce’s management has ample experience in acquiring and integrating other companies.
Salesforce, after the integration of Mulesoft, is not the only company offering services like Salesforce Integration Cloud. The market for iPaaS is growing fast, but if the current leaders continue to strengthen their positions, there is a risk that the market will funnel down to a handful of actors. In Gartner’s latest labelling of companies in the iPaaS industry, 7 leaders, including Informatica, Microsoft, and Oracle, were identified – Mulesoft was not one of them. The financial strength of Salesforce can help Salesforce Integration Cloud to achieve a strong position relative to competitors but once the market nears a glut, Salesforce may not be able to maintain a strong position.
TheStreet draws attention to that Salesforce has acquired over 50 companies in the process of building its business. Hence, it is a company that is familiar with the M&A environment and knows what to do in order to get the most out of the transaction.
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