The M&A rumor mill has turned up a number of companies reportedly interested in buying Salesforce.com (NYSE: CRM). Most have denied any such interest, including International Business Machines (NYSE: IBM), Oracle (NYSE: ORCL) and SAP (NYSE: SAP).
One company appears to be the front-runner, for now. That’s Microsoft (NASDAQ: MSFT). This would make a certain kind of sense, given Microsoft has a cash hoard of $95 billion, nearly twice that of other top contender, Oracle.
But in order to get Salesforce, Microsoft is going to have to cough up over $50 billion. It would be a hefty price, and one that would mark one of the largest tech buyouts ever. But also one of the most expensive, with Salesforce already trading at a multiple that’s north of 150 times enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA).
Microsoft did ink a broad deal with Salesforce last year, making Salesforce’s programs available for Microsoft’s Windows and Windows Phone operating systems. And a Salesforce buyout would give Microsoft a new lease on growth. Revenues for Salesforce have grown at an annualized rate of 33% over the last three years, compared to Microsoft’s 7.5% revenue growth.
So at first blush, a Microsoft-Salesforce deal looks intriguing.
But digging deeper, is it really all that great? Revenue growth at Salesforce is expected to slow to 21% this year and next. It’s generating just $5.4 billion in annual revenues, compared to the $90-billion-plus a year for Microsoft. And Salesforce’s current EBITDA margins are a seventh of what Microsoft is churning out. There would have to be a lot of hidden synergies in order to make this deal accretive anytime soon.
It seems rather imprudent to spend $50 billion-plus for a company with no earnings and declining revenue growth.
But this is Satya Nadella’s Microsoft. Recall what Nadella said when he took over as CEO in early 2014: “Our job is to ensure Microsoft will thrive in a mobile and cloud-first world.” If Microsoft wants to become a true cloud-first business, it’ll need a transformative acquisition. However, Nadella does have shareholders to answer to.
Microsoft’s stock has become a hot bed for large institutional investors over the last few years, given its steady commercial software business – which allows it to offer a steady dividend, currently yielding 2.7%. And these major institutions will not look kindly on spending nearly three years’ worth of income for a company that has never generated more than $25 million in income during a single quarter.
Oracle likely won’t be making a play for Salesforce, either, although it is the feel-good acquirer here. Salesforce CEO and co-founder Marc Benioff left Oracle in 1999 to start Salesforce. Benioff’s return could come just as Larry Ellison is looking to exit Oracle – allowing for a passing of the torch, of sorts.
A buyout by Oracle would also make Oracle the largest customer relationship management (CRM) company in the world (think: antitrust issues). Oracle CEO Safra Catz has noted, however, that a buyout of Salesforce by Microsoft or another player would be a positive for Oracle – allowing it to poach Salesforce users in the upheaval of trying to integrate Salesforce into a new company.
If investors want to play it safe, they should stick to major tech players that won’t overspend on a Salesforce acquisition.
The players that have been ruled out are SAP and IBM. SAP has ruled itself out of the Salesforce buyout game and with just $6 billion in cash, the deal would be highly dilutive anyway. Its dividend yield of 1.8% isn’t all that exciting, either.
Meanwhile, IBM pays a hefty 3% plus dividend yield. But it’s been facing a number of headwinds of late. Justifying a major acquisition as it tries to orchestrate its own turnaround is very unlikely. That’s not to mention the fact that it would be an acquisition that’s outside IBM’s core business and difficult to integrate.
On the positive side, IBM is the cheapest of the major tech companies, trading at just around 8 times EV/EBITDA. Mainframes are still a big business. It has a huge customer list and large backlog – giving it a solid moat in the tech space. Let us not forget that Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) is still a large owner and even defended the tech stock at this past weekend’s annual Berkshire meeting.
The great news for Salesforce is it might get bailed out with an acquisition. However, overplaying is never a sound strategy. Is Microsoft just desperate for any type of growth? Perhaps, and it remains to be seen, but there are still other disciplined players in the space that might be worth owning.
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