Shares of Salesforce.com Inc. CRM gained nearly 12% in yesterday’s trade following Bloomberg’s report that the company hired financial advisors for assistance in dealing with an acquisition offer from a potential suitor. Considering Salesforce’s market capitalization — $47.1 billion at yesterday’s closing price of $74.65 — it would be the largest takeover ever of a software company.
Further, citing a person familiar with the matter, Bloomberg reported that advisors could help Salesforce discourage suitors or facilitate a strategic sale. However, the report did not name the possible acquirer.
The fact that the possible buyer was not named in the report fueled speculations among investors about which of the tech giants might have the need as well as the financial strength to close the deal. Of the very few names that popped up, Oracle Corp. ORCL topped the list.
The merger of Oracle and Salesforce could create a cloud computing behemoth with a nearly unstoppable force in the technology industry. Oracle is quickly making a name for itself in the cloud computing space. Its cloud business, a coveted venture for most tech companies, is already half the size of Salesforce and is growing at an incredible pace.
Oracle is significantly focusing on the cloud space which is its main growth driver. In the most recent earnings report, the cloud segments were really the only ones that saw meaningful growth as the cloud software-as-a-service/ platform-as-a-service (SaaS/PaaS) division grew 34% year over year (in constant currency) while the cloud infrastructure-as-a-service division saw growth of 32%.
With the acquisition of Salesforce, a cloud software giant in its own right, Oracle will not only be able to drastically lower customers’ integration costs (to be incurred eventually), while marking a vast improvement in its offering and completing the current SaaS suite.
Looking at it from the financial perspective, Oracle had nearly $43.7 billion in cash and marketable securities at the end of third-quarter fiscal 2015, which signifies its capability of closing a potential takeover.
Another likely buyer could be Microsoft Corp. MSFT which has a huge cash pile. At the end of third-quarter fiscal 2015, the company had cash and short-term investments of over $95 billion. Microsoft already has a thriving CRM business that is in competition with Salesforce so buying the company would eliminate competition while hugely increasing its own capabilities.
IBM Corp. IBM could be yet another candidate which has the need to beef up its software and cloud business. The company has made several smaller acquisitions to grow its software and cloud business. IBM has forecasted the segment’s revenue to reach $7.7 billion this year. However, the company had just approximately $9 billion of cash in hand at the end of first-quarter 2015 which may be a hindrance.
In our view, Google Inc. GOOG may also go for the acquisition to boost its enterprise business. The acquisition will help the company expand its product lines in the segment, thereby boosting overall growth. The company is also financially capable as it has recently ended its first-quarter 2015 with cash and short-term investments of $65.4 billion.
Germany-based SAP AG SAP could also be a potential buyer for Salesforce. SAP is one of the largest independent software vendors in the world and the leading provider of enterprise resource planning (ERP) software. The company has been primarily concentrating on growing its cloud business to become one of the leading players in the category. However, the company has roughly $5 billion of cash in hand and therefore might have to take a huge debt for the takeover.
Our Take
Cloud computing has always been about scale, but earlier it was limited to companies expanding their infrastructure to reduce prices and expand capacity. Now, it appears as though cloud computing is entering a new phase where the focus has shifted to product offerings and those with the widest range will win. The acquisition of Salesforce would help companies in achieving their long-term goals.
With a market value of about $47.1 billion, Salesforce will not come cheap no matter who ends up buying it. Salesforce currently carries a Zacks Rank #2 (Buy).
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