A Case of Supposed Value Destruction?
Salesforce has decided to acquire Slack using a cash and stock package worth about $27 billion which would make it the 2nd largest software company acquisition on record. Salesforce, a cloud-based software company providing customer and enterprise related services, has decided to buy a fast growing and unprofitable software company called Slack which is primarily focused on workplace-based communication. The two companies had contrasting reactions in the stock market to the acquisition announcement.
The two stocks had inversely proportionate changes to their stocks after the announcement. Salesforce saw a decline in their stock price due to a shifting investor focus on preferring pure plays to conglomerates. Investors prefer diversifying their own portfolios rather than have companies doing it for them. Slack on the other hand saw an increase in their own share price due to the company now having financial backing from one of the largest players in industry.
What Possible Benefits can a Loss-making Corporation Provide?
Slack has over 10 million daily users consisting of mostly business-related communications. Salesforce can use the customer portfolio of Slack to add to their own client list. A one size fits approach to CRM and enterprise software can also add to the attractiveness of Salesforce’s software solutions which can help them grab market share from competitors and increase revenues. Arguably, I think competitors may lose out to Salesforce in the future due to them being behind in terms of collaboration solutions which is integral to the future of work.
An increased client portfolio can bring in economies of scale and help Salesforce lower average costs. Clients who use services from both firms will benefit from not having two billables as they only have to deal with one company in their future dealings. Sunk costs will decrease as marketing costs will decrease on average due to likely integration of the marketing teams of both firms. Cost saving, in my opinion, is as important in bringing in more revenues as both firms have either just become profitable or are still loss making. For them to manage expenses better would give a much-needed signal to investors that they’re becoming increasingly profitable and efficient with capital.
Acquiring a company brings a lot of costs in the short and long run. Slack is unprofitable and Salesforce will have to focus its efforts in ensuring the acquired target doesn’t have any cash flow problem until it can achieve profitability. In addition, R&D costs will be incurred to integrate products between the two firms. The costs of the transaction will take time to recover. This could be a roadblock in increasing profitability as I feel some costs might be incurred due to the transaction which can reduce margins and might impact shareholder value as the company could be potentially seen as a poor expense manager.
Lawyers, accountants, and consultants will likely be needed to help integrate the firms. Systems need to be altered which will require tech consultants to come in and set up a plan. Legal costs will accumulate in order to find the best way to legally combine the two firms. All these integrations will require a significant amount of cash to plan and carry out. However, Salesforce has successfully integrated a number of acquired targets into its structure which I feel would make the integration less costly as the company has experience in the practice.
Why I believe this Deal makes Sense
The deal will increase shareholder value due to the potential of increased revenues and cost savings for the combined entity. The opportunity to have a larger client portfolio will benefit the firms increase their market share. Slack will have a pedestal in terms of financial backing and technological prowess to take on Microsoft while Salesforce can leverage Slack’s 10 million customers into their own services while improving on the suitability of their software programs. I believe the synergies of the deal should outweigh the di-synergies and increase shareholder value in the long term.