Rumors are beginning to pick up steam. Investors are wondering, "Will Microsoft buy Salesforce?"
Last week, reports surfaced that some unnamed suitor was looking to buy the customer relationship management company Salesforce.com Inc. (NYSE: CRM). CRM stock jumped 11.6% on the day last Wednesday. The rumors quieted and CRM stock retreated a bit - 4% by Monday.
Then yesterday (Tuesday), the speculation once again rebounded. Another report indicated not just that there were suitors, but that the top contender to buy Salesforce was none other than tech giant Microsoft Corp. (Nasdaq: MSFT). CRM stock experienced so much volatility that trading was halted midday. And CRM stock, as of just before noon, was up 4.5% since the announcement.
There has obviously been a lot of conjecture to this point, and for the most part, observers are missing the bigger picture.
"Will Microsoft buy Salesforce?" is too simple a question to be asking right now. And, it's a lot more complicated than simply determining whether this would be the right move for Microsoft or not.
Here's what you need to know about any deal involving Salesforce...
Will Microsoft Buy Salesforce? Here's What to Consider
It's not a question of whether it's a good move to buy Salesforce. It is.
Right now, cloud is one of the most promising growth initiatives for Microsoft and a purchase of Salesforce would help plug a lot of holes. It would give Microsoft a clear advantage in the cloud battle that's taking place right now.
You see, cloud is a rather vague term, and it can mean different things to different people. But at its core, it's pretty simple: cloud is the delivering of services over the web.
It's become so important in the tech world - particularly in enterprise tech - because the way of handling business solutions and information technology is undergoing a massive overhaul.
There was a time when a company like International Business Machines Corp. (NYSE: IBM) was on top because its highly sought-after mainframes were key to data center architecture. But the wave of the IT future is no longer bulky hardware and cumbersome, expensive on-site data centers.
Companies want their business applications to be handled remotely, in a cloud data center, hosted by a cloud data provider. Companies like IBM, Amazon.com Inc. (Nasdaq: AMZN), and Google Inc. (Nasdaq: GOOG, GOOGL) have been building cloud data centers across the globe to handle this on-demand, for-rent, virtualized data center demand that's really moving the needle in IT trends.
Microsoft is also a key player in this. Their virtual machines are delivered through the Microsoft Azure platform.
The battle in cloud is not as much about who can provide the cloud infrastructure - the Infrastructure as a Service (IaaS) - but who can build out their cloud offerings to more than just the virtual machines.
In addition to IaaS, there is also Software as a Service (SaaS) - where software solutions are delivered over the web - and Platform as a Service (PaaS) - where engineers are given a platform to build apps on a cloud interface.
Amazon is the leader in IaaS, with a 36% market share, according to Gartner. And there is a margin-crushing price war going on in that segment of the cloud marketplace. That means the real riches in cloud are to be found in SaaS and PaaS.
And this is where Salesforce comes into play...
The Barriers to a Microsoft Purchase of Salesforce
Salesforce was built by Founder and CEO Marc Benioff with the goal of bringing an "End to Software." He views software as a utility to be delivered over the cloud.
But Salesforce's cloud push doesn't stop there. Benioff was thinking cloud in the 1990s before it was even a mainstream term. He was an early pioneer and has come to build one of the most - if not the most - successful cloud operations out there. When most people think cloud, they think of the Amazon Web Services (AWS) model. They think virtual machines, data storage, email storage - simple cloud operations.
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Benioff sees the cloud doing much more. The cloud should be handling CRM, enterprise resource planning (ERP), customer data and the like. It's this thinking that has made Salesforce the more than $5 billion, cloud-based CRM company that it is. To get a sense of where Salesforce stands, they are four times larger than any software company dedicated to CRM before them, according to Gartner analysts.
Salesforce would certainly be a boost to Microsoft. According to a report by JPMorgan, Microsoft's future is predicated on the success of three main areas: Office 365, Microsoft Azure, and "the third leg of the stool" - CRM. A purchase of Salesforce would secure the future of this initiative almost entirely and allow Microsoft to focus their efforts on building Azure's stature in the cloud market.
But while it's certainly an easy choice to make, it's not as simple as Microsoft just writing a check.
Salesforce is a nearly $50 billion company and Benioff is a powerful personality long characterized by his challenging of the industry status quo. It would take a lot to get him to sell his empire. And he has every reason to stay independent.
That means Microsoft would have to pay a hefty premium. JPMorgan analysts say the purchase could be as much as $100 a share, or $65.6 billion. Microsoft's free cash flow is currently sitting at $26.3 billion, while its debt is $31.9 billion - and rising.
And while Salesforce has posted negative earnings in 13 of the last 15 quarters, they've grown sales every quarter (on a quarterly, not just year-over-year, basis) since they went public in June 2004. What's more, their free cash flow, at $235.4 million sits at 16.3% of revenue. Most value investors look at a figure of more than 5% in picking solid companies with a solid cash flow-to-revenue ratio.
Benioff also likely wouldn't sell off the company without becoming chairman of Microsoft's board, another tricky proposition when the current chairman, John Thompson, has had praise heaped on him for locking up Satya Nadella as CEO and helping spark a substantial turnaround in this beleaguered tech company.
Jim Bach is an Associate Editor at Money Morning. You can follow him on Twitter @JimBach22.
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