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Shares of Salesforce.com (NYSE:CRM) take another leg towards the downside in Tuesday's trading session. The leading provider of customer relationship management solutions announced the acquisition of ExactTarget (NYSE:ET).

The deal is the largest to date for Salesforce.com and discomforts its investors. Shareholders are fed up with the continued dilution of earnings and large acquisition related charges.

The Deal

Salesforce.com announced that it has reached a definitive agreement to acquire ExactTarget in an attempt to reinforce its position as a leader in cloud based CRM solutions. Under terms of the deal, shareholders in ExactTarget stand to receive $33.75 in cash for their shares valuing the firm at $2.5 billion.

Salesforce.com will combine ExactTarget's leading digital marketing capabilities with its own sales, service and social marketing solutions, thereby boosting its offerings as a world class platform for email, social, mobile and web-based solutions.

A citation from research company Gartner in the press release from Salesforce.com reveals that marketing spending on digital campaigns is expected to rise quickly. By 2015, about a third of traditional marketing budgets will be spent online, a trend expected to continue going forward.

CEO and Chairman Marc Benioff commented on the rationale behind the deal, "The CMO is expected to spend more on technology than the CIO by 2017. The addition of ExactTarget makes Salesforce the starting place of every company and puts salesforce.com in the pole position to capture this opportunity."

ExactTarget reported full year revenues of $292.3 million, up 40.9% on the year. Net losses narrowed to $21.0 million over the past year. The company ended its most recent quarter with $101.0 million in cash and equivalents and $5.7 million in total debt, for a solid net cash position. The deal values operating assets at approximately 8.5 times last year's annual revenues, a multiple expected to come down to 6.6 times this year's annual revenues.

The deal which is unanimously approved by the board of both companies is expected to close in the current second quarter.

An Update To The Full-Year Outlook

On the back of the deal, Salesforce.com expects to increase its annual revenues for 2014 by $120 to $125 million. Non-GAAP earnings per share are expected to fall by sixteen cents on the back the deal and $40-$45 million in integration and transaction charges. Second quarter non-GAAP earnings per share will be diluted by an expected five cents.

Full year revenues are now expected to come in between $3.96 and $4.00 billion. Non-GAAP earnings are now expected to come in between $0.31 and $0.33 per share, while Salesforce.com expects to report GAAP losses of $0.47 to $0.49 per share.

Valuation

Salesforce.com ended its first quarter with $3.1 billion in cash, equivalents and marketable securities. The company operates with $1.7 billion in convertible debt outstanding and capital lease obligations, for a net cash position of around $1.4 billion. Following completion of the deal, Salesforce.com will operate with a modest net debt position.

Trading around $39.50 per share, the market values Salesforce.com at around $23.4 billion. Based on the updated full year guidance, shares are now valued at 5.8 times expected annual revenues and roughly 125 times non-GAAP earnings.

A Holiday Break From Future M&A Activity

Investors are not happy with the latest purchase which sent shares to levels around $39.50, thereby sending almost $900 million market capitalization up into smoke. This is understandable given the $800 million premium which the company offers for shares of ExactTarget.

The company's transformation from being purely a CRM business into the cloud has resulted in numerous acquisitions in recent years of which this one is the largest to date. Last year, it paid almost $700 million to acquire Buddy Media, while it paid several hundreds of millions as well for Jigsaw, Heroku and Radian6 in recent years.

Investors are obviously not too happy with this given the dilutive effect of the deal and the high one-time costs related to the integration. Perhaps they should be comforted by comments from CEO Benioff which suggested the company might take a "vacation from M&A for anywhere between probably 12 and 18 months."

Investment Thesis

As recent as last week, I took a look as the prospects for Salesforce.com following the release of its first quarter results.

While I noted that the revenue multiple is not even that excessive for a promising growth company, the earnings valuation is. I concluded that shares were rich on the back of an expected increase in future competition. Furthermore, the company uses its own stock as an overvalued currency to make acquisitions which boost reported revenue growth. The large discrepancy between GAAP and non-GAAP earnings is an issue as well given the sizable stock-based compensation expenses.

The deal with ExactTarget is simply a repetitive move. Interestingly enough, the company is using cash this time to finance the deal instead of its stock. This is after the company recently raised cash with a convertible bond offering, which could still lead to future dilution of the shareholder base. While the deal will boost reported revenues, the bottom line will take a renewed hit.

Shareholders are not buying into the story of improved offerings, and potential cross selling to ExactTarget's 6,000 large customer base including names like Coca-Cola (NYSE:KO), Gap (NYSE:GPS) and Nike (NYSE:NKE). While Salesforce.com claims the deal will most likely create long-term value for the company, investors are looking towards the short term now and are focusing on the 16 cents dilution to non-GAAP earnings for the year.

It is easy to spot the winner in this deal. ExactTarget's shareholders receive a 53% premium compared to Monday's close, while investors in Salesforce.com have to pay for the premium.

I reiterate my stance on the stock. As Wall Street becomes impatient and disappointed with the stock, a bearish position might continue to offer the best risk-reward in the short-to-medium term.

Source: Salesforce.com - Investors Are Disappointed With Yet Another Expensive Dilutive Acquisition