Marc Benioff Is Taking A Page From Larry Ellison's Playbook

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

Summary

"I love the CEO. I love the company. I love the brand. I love everything about Twitter" says the CEO of Salesforce.

Three out of the four acquisition targets that Salesforce was considering in May have already been acquired or have signed a merger agreement.

Does this shift towards larger acquisitions point to a potential slowdown in organic growth at Salesforce?

Earlier this week the Wall Street Journal reported on a hacked email from Salesforce board member and former Secretary of State Colin Powell that contained a list of potential acquisition targets for Salesforce (NYSE:CRM). The list and the notes associated with these targets was interesting on multiple levels. You can see the slideshow with the list of potential targets here.

The presence of Adobe (NASDAQ:ADBE) on the list was odd considering Adobe's market cap exceeds that of Salesforce. It turns out that Adobe was on the list as a valuation benchmark and was not exactly a target. It was also a little unusual to see companies like NetSuite (NYSE:N) Workday (NYSE:WDAY) on the list as these companies focus on core enterprise software and would appear to be a better fit for companies like Oracle (NASDAQ:ORCL), SAP, Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM).

In fact, Oracle is in the process of acquiring NetSuite but has run into some resistance from one of its largest shareholders T. Rowe Price, who is holding out for a higher price. Unfortunately for both T. Rowe Price and Salesforce, most of the cards in this game are held by Larry Ellison who owns nearly 40%of the company, down from a stake of 74.1% when NetSuite went public in December 2007. The tender offer for NetSuite has been extended through November 4th and I would be surprised if T. Rowe Price doesn't tender its shares by then. The spread on the NetSuite acquisition is 5.9% or 30.37% annualized according to our Merger Arbitrage Tool. NetSuite is one of the oldest Software-as-a-Service (NASDAQ:SAAS) companies and is from an era when the whole cloud jargon had not become common parlance.

There are several other reasons companies like NetSuite and Workday may not be a good fit for Salesforce including the underlying technology, the culture and the business segment they focus on. Looking through the list, it looks like Salesforce was more serious about LinkedIn, ServiceNow (NYSE:NOW), Tableau Software (NYSE:DATA) and Demandware having assigned code names to those prospects. The list was prepared in May and one of the acquisition targets on this list, Marketo, was acquired by Vista Equity Partners for $1.79 billion or $35.25 per share in cash. The deal was announced on May 31, 2016 and was consummated just 77 days later. Salesforce announced the acquisition of Demandware on June 1, 2016 and completed the acquisition just 42 days later.

The acquisition of Twitter (NYSE:TWTR) by Salesforce probably made as much sense to Salesforce investors as the LinkedIn (NYSE:LNKD) acquisition to Microsoft investors. It was interesting to hear Salesforce's CEO Marc Benioff say

"I love the CEO. I love the company. I love the brand. I love everything about Twitter but our stockholders don't and I listen to them".

On the surface they are completely different businesses until you realize the reach these social networks have and the value a creative management team can realize.

A company like Hubspot (NYSE:HUBS) might be a better fit for Salesforce considering the size of the company, its high growth rate and the fact that it is a marketing software company. Instead of owning the social networks themselves the alternative is to own the software companies like Hubspot and Marketo that allow marketing teams to manage their marketing campaigns across several channels and networks. For most large consumer focused companies, a social media strategy is essential and these marketing automation companies help companies manage their spend across various channels and attempt to quantify the ROI, which used to be incredibly difficult in the old advertising age.

Salesforce has the opportunity to acquire several of these marketing automation companies as well as cloud software companies that are built on the Salesforce platform. Most of these companies are relatively small public companies or private companies. The fact that Salesforce is even considering large acquisitions like NetSuite and Workday potentially implies that they see organic growth slowing down and are taking a page from Oracle's playbook where Larry Ellison embarked upon a series of large acquisitions more than a decade ago to boost growth. Ellison's acquisitions were sometimes hostile (Peoplesoft) and at other times were of companies like Sun Microsystems that appeared to make little strategic sense to shareholders.

Irrespective of what happens to Twitter, it will be interesting to see how many of the companies on this list will be eventually acquired by Salesforce or by one of the other "interlopers" mentioned in the M&A Target Review slideshow. One thing for certain is that these companies are likely to continue trading at a premium when compared to their peers.

Disclosure: I am/we are long TWTR, LNKD, WDAY.

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.