Salesforce Shares Fall After Buying ExactTarget, But They Won't Be Down For Long

Jun. 5.13 | About: Salesforce.com, Inc. (CRM)

Shares in Salesforce.com (NYSE:CRM) plummeted on June 4 after the company announced that it had agreed to purchase ExactTarget (NYSE:ET) for roughly $2.5 billion. Salesforce closed at $41.04 on June 3. By the end of the day on June 4, the online customer management software maker was trading at under $38.

Background

The acquisition marks the latest for Salesforce -- and there have been a lot. Over the last five years, CEO Marc Benioff has spent at least $4 billion on more than 40 deals, including ExactTarget. "We couldn't just keep making these small acquisitions -- that strategy was taking, honestly, too long," said Benioff on a conference call discussing the acquisition. "Salesforce.com wants to be the number one CRM company in the world... We've of course have to be number one in sales, which we are. We have to number in service, which we are. But we also need to work even harder to become number one at marketing." The ExactTarget acquisition is meant to fill that gap in Salesforce's offerings and improve synergies within its existing product family.

ExactTarget

ExactTarget was founded in 2000. The company makes software that allows users to customize emails and social media ads based on their respective preferences, as tracked through clicks. The company gets roughly 80% of its revenue from email, so the technology fills a huge gap in Salesforce's offering. But ExactTarget is still very young. The company hasn't reported a profit since 2008, and is forecasted to be in the red this year and next at a minimum. Rumor is that rival business management software maker SAP had considered buying ExactTarget, but ultimately passed on the deal.

Effect on the Bottomline

Salesforce ended up paying 7.6 times ExactTarget's revenue to acquire the company, or more than 53% the company's closing price on June 3 -- but it is a deal the company expects to pay off sooner rather than later.

Salesforce expects "about $0.05 of the $0.16 non-GAAP EPS reduction to fall into the second quarter, most of that's related to due-diligence, banking fees and other transaction related costs along with two weeks worth approximately of operating losses for ExactTarget," explained CFO Graham Smith. "As a result, we expect the acquisition to reduce full-year 2014 non-GAAP EPS by approximately $0.16, resulting in an updated FY14 non-GAAP EPS estimate range of $0.31 to $0.33... That's up slightly from our prior guidance."

Smith stopped short of providing a forecast for the full-year GAAP EPS, saying that the company will provide that guidance in tandem with its second-quarter results, after the transaction closes.

One Stop Shop

The ExactTarget acquisition was a bold move, but when it comes to expanding efforts into an area, like marketing, Salesforce only had two choices -- create or acquire -- and something was necessary in order for Salesforce to retain its crown as the top customer management software provider. Becoming a one stop shop is a smart move, as long as the company puts in the leg work to make everything work together easily -- and it looks like it will.

In the June 4 conference call, CEO Benioff was careful to say that this is the last acquisition for a while. I think this is a strong clue that the company is going to spend the next several months working on integrating everything together tightly to drive engagement from its customers. Also, there is already a lot of client overlap so uptake of an integrated product should be strong. Moreover, synergies from that integration should lower Salesforce's operating costs enough that the gains from the acquisition are felt across the board.

Conclusion

Salesforce may have taken a hit after announcing the ExactTarget acquisition, but this just makes it a better opportunity for the long term investor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.