Salesforce.Com To Buy MuleSoft For 21 Times Revenue - Why?
Summary
- Salesforce.com has announced that it will buy MuleSoft for $6.5 billion, or 21 times the latter's 2017 revenue.
- The company is willing to pay the premium because it will give them tremendous short-term and long-term gains from servicing on-premise infrastructure and conversions to cloud products.
- The acquisition could boost Salesforce.com's chances of achieving its $20 billion annual revenue goal for 2022.
Salesforce.com (NYSE:CRM) announced yesterday that the company will be buying MuleSoft for an enterprise value of a whopping $6.5 billion, a 36% premium over Tuesday’s (March 20th) closing price. MuleSoft had reported an annual revenue of $296.46 million in 2017, which means Salesforce is buying them at nearly 21 times revenue.
The reason why Salesforce is ready to pay such a premium is because for the last two consecutive years MuleSoft has posted above 50% growth, and things are indeed looking promising for MuleSoft.
MuleSoft runs a platform that allows large enterprises to seamlessly work across multiple software applications, data and devices. As software kept developing at a fast pace, many large organizations suffered from not being able to keep up with that pace. A good example is enterprises that are still operating IT infrastructure in their own premises despite cloud infrastructure offering cost savings and other technology advancements.
Legacy software and applications will always remain a headache, slowing things down for large companies. It’s an almost tangible pain point, and one that MuleSoft addresses through its AnyPoint Platform.
“Anypoint Platform is a single, unified platform that includes the key technology components required for IT architects, developers, and systems administrators to easily build and rapidly scale their application networks. It includes a universal connectivity model, end-to-end API lifecycle capabilities, a resilient and scalable runtime engine, enterprise-grade governance and security, and a collaborative engagement exchange for self-serve discovery and reuse of IT assets. “- MuleSoft Annual Report 2017
What’s significant is that Mulesoft will bring its 1,200 customers, which include Coca-Cola (KO), Barclays (BCS), Unilever (UL), VMWare (VMW), GE (GE), Accenture (ACN), Airbus (OTCPK:EADSY), Cisco (CSCO), AT&T (ATT) and Mount Sinai. While Salesforce.com might already be counting many of them as its clients, MuleSoft’s platform’s ability to integrate disparate parts of a company’s IT infrastructure will give Salesforce.com access to tremendous amounts of data. The more data it gets its hands on, the better for its own CRM product lineup because products can be cross deployed for revenue gains.
Apart from this, it also reduces the friction for new companies that are still not using Salesforce.com’s products due to legacy software issues. Clearly, MuleSoft opens up a lot of doors for Salesforce.com, while adding a potent capability to its arsenal. That’s exactly why Salesforce.com is more than ready to pay such a heavy premium to buy the company.
CRM has set an ambitious target to reach $20 billion in revenues by 2022, which is certainly an achievable target, as I outlined in a recent article called A Compelling Reason To Invest In Salesforce.com. The addition of fast-growing MuleSoft revenues will certainly help the company over the next several years. The further cloud technology advances, the worse legacy infrastructure will become, and all those enterprise customers are going to need platforms that will reduce those integration issues and allow them to cut across on-premise and cloud properties, which Salesforce+MuleSoft will be in a perfect position to service.
On the one side there are immediate gains to be made from adding a strong revenue growth engine, albeit minuscule at this point considering the company’s overall revenues. It will play a key role in keeping Salesforce.com's overall growth rates above the 20% level, which it needs to hit its 2022 target. On the other side, there’s a long-term horizon to keep servicing on-premise customers until they finally decide to move to the cloud, which is inevitable.
Either way, it’s only going to help Salesforce.com get to $20 billion that much faster. As I iterated in the previous article:
“There's literally no margin of safety for anyone in Salesforce.com at this time, and yet I would still recommend a buy. There are several reasons for that, among which are:
Market leadership.
Sustained revenue growth despite aggressive, deep-pocketed competitors.
A consolidating Customer Relationship Management software market.
Precedence from the cloud computing infrastructure industry itself.
A management team that's proven itself over and over.”
This article was written by
Analyst’s Disclosure: I/we 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.