Why the Salesforce.com Acquisition Rumors Miss the Mark on Cloud (CRM)

salesforce.com acquisitionRumors that a big tech player is ponying up funds for a Salesforce.com acquisition give the financial media a lot to talk about.

And yesterday Salesforce.com Inc. (NYSE: CRM) stock was up 12% on the rumors.

So, who will buy Salesforce? Right now the Wall Street media circus is in full swing trying to find an answer.

Will it be Microsoft Corp. (Nasdaq: MSFT)? Oracle Corp. (NYSE: ORCL)? Google Inc. (Nasdaq: GOOG, GOOGL)? Or just insert tech giant name here...

The problem with this kind of speculation is that it's lazy. And the real discussions about the industry that should be taking place are lost in a flashy but substance-less argument over who stands to gain by buying Salesforce.

We'll save you the time. Everybody in the tech world who wants a bigger footprint in cloud should be clamoring to buy this company. Who wouldn't want to buy Salesforce?

The case can be made for every big tech player:

  • Oracle: Salesforce CEO Marc Benioff is an Oracle alum and a great friend to Larry Ellison.
  • Microsoft: Hasn't CEO Satya Nadella been pushing hard on cloud since he stepped in as CEO last year?
  • International Business Machines Corp. (NYSE: IBM): This is a natural fit for a company with a large rolodex of Fortune 100 clients and a pressing need to make a splash in the enterprise cloud scene.

If CEO Benioff could be bought off, he would have been by now. It's been 15 years since Benioff started revolutionizing the customer relationship management (CRM) business and making Salesforce the first billion dollar cloud company.

But Benioff is a different kind of entrepreneur.

He's a corporate do-gooder with a knee-jerk aversion to the 9-to-5 lifestyle. He cut his teeth in the laid-back offices of Apple Inc. (Nasdaq: AAPL) in his younger days. And he left Oracle to start Salesforce out of fear of becoming a "corporate lifer."

He's not going to so easily watch his empire - built on "gonzo marketing" with a mandate to bring an "end to software" - be swallowed up by an industry Goliath. It runs counter to everything he's built Salesforce on.

So, the financial media can have fun speculating on which giant may consider, just maybe, buying Salesforce.

But they're letting the real story of the industry elude them...

Why a Salesforce.com Acquisition Makes Sense for Everybody in the Industry

What is Salesforce.com exactly?

It started out as the brainchild of Marc Benioff's in the late 1990s, who was at the time working under Larry Ellison at Oracle.

He was stunned by the expensive overhead costs that came with managing sales software. It wasn't just the software that was expensive. It was the support, the consulting services, the hardware, the training, etc. He wanted to give salespersons an ability to track leads and manage clients in a much easier, more cost-effective manner.

This could be done through an on-demand approach - a web interface, Software-as-a-Service (SaaS) solution. Today it's known popularly as "cloud." It would challenge the cumbersome on-premise software approach to one that operated through a cloud-based, hosted model.

Not only did it revolutionize the so-called CRM industry - of which Salesforce is the leader at a 16.1% market share, according to Gartner - but it was one of the first-movers in the cloud. Benioff has often claimed that he wants to bring on an "end to software." He wants enterprise solutions to be handled in the cloud, not through expensive software solutions.

It's the company's pioneering in the cloud that is stirring up rumors of a possible Salesforce acquisition.

But it's also a bigger indication of just how important the cloud has become in the enterprise tech industry.

Salesforce.com Acquisition Highlights Just How Important Cloud Is

Any tech company that's not in the cloud right now has already lost. As an illustration of this, IBM had to buy SoftLayer in 2013, rather than build out its own cloud offering, because you have to be fast if there is any hope at grabbing a piece of the cloud market share.

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Cloud can be viewed through three prisms.

The most mature component of cloud is Infrastructure as a Service (IaaS). This is the primary cloud solution that companies offer to handle workloads once handled by hardware.

On this front, the battle lines have largely been drawn. Amazon.com Inc. (Nasdaq: AMZN) with its Amazon Web Services offering is far out in the lead at a 36% market share, according to Forrester, but is fighting a price war with Google, Microsoft, and IBM that is going to continue to squeeze profitability for anyone trying to operate in IaaS.

There are two other components of cloud where companies still have a chance to succeed without facing a margin-crushing price war. There is Platform-as-a-Service (PaaS), a solution that offers the cloud infrastructure to help businesses write applications. And then there is Software-as-a-Service (SaaS), the kind of hosted applications that Salesforce offers.

Salesforce.com leads the PaaS market share at 19%. And it's dominating market growth in SaaS. Salesforce grew 24.7% faster than the closest competitor, Microsoft, in SaaS CRM revenue from 2012 to 2013, according to Gartner.

Anybody who wants to bolster their cloud portfolio in a huge way should be getting their funds in order for a Salesforce.com acquisition. It's a no-brainer. Whether that's Amazon, IBM, Microsoft, Oracle - you name it - this would be a smart purchase for anybody seeking cloud dominance.

But Benioff won't be so easily bought off.

There's a story Benioff recounts in his 2009 book Behind the Cloud: The Untold Story of How Salesforce.com Went from Idea to Billion-Dollar Company - and Revolutionized an Industry.

It happened in 1999. He and his friend were discussing Hotmail.com, which had just been purchased for $400 million.

"That's a lot of money, Marc. Don't you think that's a lot of money?" his friend asked.

"No, I would never sell for that. They left a lot of money on the table," Benioff replied.

The Bottom Line: Salesforce.com is worth $49 billion. It would be the largest software acquisition ever. A Salesforce.com acquisition would have to pay a hefty premium before Benioff abandons his empire, built on challenging the status quo, to a company like Microsoft that is the status quo. Conversations about which company will pony up the dough for a Salesforce.com acquisition are always fun roundtable discussions for the financial news stations, but they leave out the real discussion that should be taking place. Who will dominate cloud? And right now, the buzz around a Salesforce.com acquisition gives a good indication of who will.

M&A is not just dominating the cloud discussion... It's also making headlines in the energy sector. A lot of shortsighted investors seem to think that the low energy prices are going to weaken the big players. Much to the contrary, it's going to spark an M&A spree that creates more heavyweight energy giants...

Jim Bach is an Associate Editor at Money Morning. You can follow him on Twitter @JimBach22.