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On Tuesday 1st December 2020 was announced the biggest acquisition of the cloud software industry. Salesforce entered into an agreement to acquire Slack for $ 27.7bn. Each Slack’s investors will receive, per share owned, $ 26.79 in cash and 0.0776 shares of Salesforce which represent approximately a 55% premium compared to the value of Slack shares before the deal was announced.

On the one hand, Slack is a computer software start-up that was founded in 2009 by four entrepreneurs. It is a software dedicated to companies that improve the employees’ productivity by reducing the number of emails and meetings through an innovative business messaging platform. Today, more Slack is used by more than 12 million people every day among which more than 119k people have the premium version. It employs approximately 2,510 employees.

On the other hand, the acquirer, Salesforce, is a provider of enterprise software, delivered through the cloud, with a focus on customer relationship management (CRM). Today, Salesforce has more than 150,000 customers from small businesses to fortune 500 companies.  It employs approximately 49,000 employees.

Marc Benioff, chairman and CEO of Salesforce, said that “Together, Salesforce and Slack will shape the future of enterprise software and transform the way everyone works in the all-digital, work-from-anywhere world”.

Both of those companies provide business related software and can benefit from each other’s customers.

Overview of the current market situation

Slack’s main competitors (Date – 2020):

Microsoft Teams is the biggest competitor of Slack. Skype is also a tough competitor but in the recent past, Slack has been trying to win market shares over Teams. The competition amongst those two companies is quite tense. In fact, Microsoft recently implemented Teams on its pack office which automatically downloaded Teams on every pack office owner and thus increased a lot the use of this software. Slack responded by filing a complaint against the European Commission explaining that it is more difficult for Slack to win that much market shares.

Salesforce’s main competitors (Date – 2020):

Salesforce is a dominant force in the CRM world. It is the world’s largest CRM platform. Nevertheless, the CRM software market is highly competitive. A lot of competitors emerge with a important financial resources. In fact, a lot of alternatives to Salesforce exist such as a recent company, HubSpot CRM that almost achieved $ 1B in revenue in 2020.

It is no secret that most of the computer software companies have strongly benefited from the COVID-19 crisis. Both Slack and Salesforce have experienced an important growth compared to what it was forecasted. For example, Slack’s revenues grew 49% to $216 million for the second quarter of 2020 and grew 39% to $ 234.5 million for the third quarter of 2020.

This transaction seems to happen in the best time possible for Slack that realized its best results in 2020. Thus, it is legitimate to question whether Slack will continue to have this tremendous growth which led to wonder whether Slack has been overvalued by Salesforce.

Recently, no companies similar than Slack have been acquired. Nonetheless, the overall software industry has had active corporate finance activities. In the US, in February 2019, Hellman & Friedman (a Private Equity firm) decided to acquire Ultimate Software (a cloud-based human capital management software system for businesses) for $ 11 billion. Notable recent European deals in 2020 include the acquisition of Veeam Software (data management software) by Insight Partner (Private Equity firm) for $ 5 billion or the acquisition of RIB software (information modelling software) by Schneider Electric (providing energy and automation digital solutions for efficiency and sustainability) for $ 1.3 billion.

In 2011, Salesforce already acquired Dimdim which was a software company that enabled its users to interact between each other’s to realize web conferences or to chat for examples. The issue with those services proposed is that the users were only able to communicate internally and not with people coming from different companies. Once Microsoft Teams and Slack were created, Salesforce was not able to compete with those two companies based on DimDim’s acquisition.

Is the deal going to be accretive or dilutive?

Both companies strongly believe that the acquisition will complement each other businesses creating positive synergies.

On the one hand, Salesforce is currently trying to develop tools to increase productivity in addition to the ones already developed linked to CRM services. Therefore, Slack has the perfect software that would help Salesforce to succeed in this new strategy. Moreover, Salesforce has an experience in creating and in developing a PaaS strategy. A lot of tech experts believe that Slack should adopt this strategy to take advantage of its environment. The same people are convinced that it should implement this strategy under Salesforce thanks to its expertise.

On the other hand, this acquisition will allow Slack to expand its presence not only by benefiting from the 150,000 Salesforce’s customers but also for all companies that are undergoing digital transformation. Furthermore, this operation would enable Slack to better compete with Microsoft Teams. Recently, there has been a stiff competition between Slack and Microsoft Teams. Salesforce might give Slack the proper financial, human, and reputational resources required to compete with such a tech giant.

Now the question is: did Salesforce overpay for Slack?

Major Acquisitions in 2020 of tech companies mainly following a SaaS business model:

To find relevant information about similar transactions that happened in 2020 was complex. But the table enabled us to have a point of view regarding a type of multiple used to value tech companies which is the Enterprise Value / Number of Users. The multiple used in the last row is the price paid for the tech company instead of its enterprise value, but still it enabled us to analyse whether Salesforce paid a premium that was too high or not. Our analysis led us to underline that Slack multiple is lower than the average. Still, it seems that Adobe paid a high price for Workfront that biased the average. Thus, based on that information, we can draw the following conclusion: we think that Salesforce paid a fair price that is in line with the economic cycle that favoured a lot of tech companies.  

Now let us analyse another metric used to compare SaaS (Software as a Service) companies which is the ARR. It stands for annual recurring revenue, which is a standard revenue metric favoured by modern software companies whose services are sold on a recurring basis rather than a one-time basis (licencing). At the time Slack was acquired, it realized an ARR of $1 bn meaning that it was acquired for 27.7x its ARR.

Even though this multiple is considered as high when it goes over 25x, back in December 2020, there are other SaaS companies that traded at a higher ARR. The table below shows the example of three famous software companies, which are Zoom, Shopify and Pinterest. We can see an increase of their ARR multiple. It is mainly explained by the fact that they strongly benefited from Covid.

Evolution of ARR multiple of three different tech companies:

Pluralsight was also acquired in December 2020, it is another software company that provides video training courses for software developers. It was acquired by Vista for $3.5 bn, which represented approximately an 8.5x ARR multiple.

Finally, if we compare to Salesforce trading multiple, in December 2020, it was trading at 9x its ARR meaning that Slack was acquired based on a multiple that is more than 3 times the one of the acquirer. It can make sense because Salesforce is a mature company whereas Slack is not, those two companies are in two different business life cycle, explained by this high ARR multiple that is relying on Slack’s growth opportunity.

There’s every reason to go for it 

To conclude, this deal cash-and-stock deal is the largest in the soaring cloud software industry, beating Microsoft’s $26.2bn purchase of LinkedIn four years ago.

Slack and Salesforce already worked together before the acquisition took place. This deal makes perfectly sense from a strategic perspective. In fact, both companies will strongly benefit from the synergies created by this acquisition. On the one hand, Slack needs the resources provided by Salesforce to better compete with Microsoft Teams and thus to grow by expanding its customer base. On the other hand, Salesforce needs and wants to diversify the services it provides. A perfect option was Slack that operates within the same industry in which Salesforce already tried to penetrate but without being successful.

My point of view regarding this acquisition is positive. First, one of the reasons why mergers or acquisitions fail is linked to the cultural fit between the two companies. In this case, the two companies already know how they operate which means that this acquisition will not fail due to this reason. Second, the price paid was fair back at the time. In fact, the most reliable metrics that we discussed is the ARR multiple and even though the average is 10x, 27.7x makes sense by comparing to ARR multiples of some tech companies that do not have as many growth opportunities as Slack has. Third, the biggest threat of Salesforce is Microsoft Teams. From a technological point of view, Slack seems to be a more complete and a better organize software. By continuing to improve different technological points, I believe Slack can gain market shares against this giant in the mid-term.

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