Salesforce & Slack – Opportunistic strike.

Salesforce picks off a weaker player.

• Salesforce is paying $45.52 per share (at Salesforce’s December 1^st close) to acquire Slack, in a move that values the company just 18% above its IPO price again underlining my view that the company was really struggling to make it on its own.
• Slack adds an interesting dimension to Salesforce and brings it more into direct competition with Microsoft which is slowly but surely widening its suite of digital work services around Office365.
• However, I think that this is an opportunistic acquisition that was triggered by Salesforce’s realisation that Slack is a nice to have service rather than a must-have and that it would be able to pick it up relatively cheaply.
• The fact that Salesforce is paying 41% of the price in shares is also an indication that Slack did not have a lot of wiggle room when it came to the negotiation over price.
• This lack of essentiality became glaringly obvious in its Q2 2020 results when compared to those of Zoom.
• While Zoom reported one of the biggest beats of expectations in recent times in Q2 2020, Slack was very disappointing as the COVID-related bounce in its performance was nowhere to be seen.
• Slack reported revenues that beat expectations and grew nicely but a deceleration in billings indicated that the pain being felt by the smaller end of the economy is being reflected in its performance.
• Q2 2020 revenues were $225.9m compared to forecasts of $209.2m but billings were $218.2m compared to forecasts of $232.9m.
• What concerned me was the discrepancy in performance as it indicated that clients think that Zoom is far more important to their business than Slack.
• Hence, when hard choices needed to be made, Slack was the first to go.
• Slack also called out Microsoft Teams as a key competitor and even went so far as to lodge a complaint with the EU with regard to Microsoft’s bundling of Teams with Office.
• Interestingly, Zoom should be just as threatened by Teams (if not more so) given how similar they are but it has continued to perform extremely well and did not feel the need to whinge to the EU.
• This suggests that Slack’s inferior performance has more to do with the quality of its user experience and its functionality than unfair competition from Microsoft.
• This is what I suspect has driven the weakness as even the cloud companies have seen spending being prioritised to mission-critical areas at the expense of the normal IT spend.
• I don’t see this changing much as the outlook for the economy is a stilted recovery hampered by increasing taxation, crushing indebtedness and low consumer demand.
• Consequently, Slack has obviously continued to struggle which is what has driven it into the arms of Salesforce.
• With Slack bundled in with Salesforce’s leading customer relations management products, Slack should be able to add some value as it will help to keep Salesforce’s core product differentiated from competitors.
• Whether or not it will add nearly $28bn of value is another matter entirely, and I think that the real winners from this transaction are the shareholders of Slack.
• I think that they are very happy sellers and I suspect that not much is going to come from this acquisition.
• Hence, I don’t see pressure on Microsoft ratcheting up very much and so I see no need to change my outlook there.
• I was a keen holder if Microsoft for years up until the pandemic fuelled rally, but I continue to think that it is now too expensive and that holders should take at least some money off the table.