Introduction
In December 2020, Salesforce announced it would be acquiring the workplace chat app Slack for $27.7 billion.
Companies Overview
Salesforce.com, Inc (NYSE: CRM)
Founded in 1999, Salesforce is an American cloud-based solutions provider headquartered in San Francisco, California. Salesforces offers a Customer Relationship Management (CRM) solution that provides insight into customer habits based on data accumulation. It sells the services to a variety of industry leaders such as Spotify, Walmart as well as Berkshire Hathaway. Salesforce is present in the Americas, Europe and Asia-Pacific. The company has been growing rapidly as can be seen by its 28.7% revenue growth in 2020, raking in more than $17 billion.
Slack Technologies, Inc (NYSE: WORK)
Founded in 2009, Slack is an American software company headquartered in San Francisco, California. Slack, initially named Tiny Speck, launched “Glitch”, a computer game back in September 2011. Following Glitch’s failure, the project was terminated in 2012. During the game’s development, the team used an internal communication software named Slack (Searchable Log of All Conversation and Knowledge). They subsequently decided to launch this product and renamed the company Slack Technologies in 2014. Following 12 successful rounds of funding, Slack went public in 2019. It now counts more than 10 million active users around the world, including IT giant IBM and its 350,000 employees. In 2020, the company experienced strong revenue growth of more than 57%, expanding revenues to $630 million.
Industry Analysis
The cloud computing industry is globally divided into Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS) segments. Salesforce and Slack operate in all of the three different segments of this industry through different products and services offered.
The global cloud computing industry is highly concentrated in the United States of America, where both companies are headquartered, accounting for 35.3% of the global industry (as of 2019 values). The US companies dominate this highly competitive sector, with AWS Inc, Microsoft Corp., Google LLC, and IBM Corp. being the 4 US-based companies among the top 5 players globally.
The cloud industry is growing at a very strong pace in recent years, experiencing double-digit growth, with the total revenues reaching $261.9b in 2019, and a compound annual growth rate (CAGR) of 29% between 2015 and 2019.
Main trends in the industry are represented by:
- Shift away from company-owned data centers to the cloud
- Growth of Internet of Things (IoT)
The first trend, combined with an intense rivalry within the industry that further pushes companies to improve the quality of their products, has proven to be very lucrative to the leading cloud providers, especially in America, because it increases their sales volumes almost directly. Also, the second trend has strong positive effects on incumbent players since nowadays we rely on smart devices for everything we do, and they must connect to the cloud in order to function.
Due to the COVID-19 pandemic, the performance of the industry is forecasted to decelerate, and industry growth is expected to slow down to more moderate rates. Many experts are predicting a possible “commoditization” of cloud services and products offered resulting in price erosion and a decrease in profit margins.
Deal Structure
In December 2020, Salesforce agreed to acquire Slack Technologies for $27.7 billion. The acquisition of the workplace chat app will be the largest takeover in the cloud software industry, beating Microsoft’s purchase of LinkedIn for $26.2 billion four years ago.
Under the terms of the deal, each share of Slack will be converted into the right to receive 0.0776 shares of Salesforce common stock and the right to receive $26.79 in cash, representing about a 55% premium to Slack’s price on November 24 – the day before reports about deal talks between the companies. The acquisition is expected to be closed in the second quarter of 2022, despite the recent request for more information from the U.S. Justice Department’s Antitrust Division.
Each option, restricted stock unit award and Slack restricted share award will be converted to receive the merger consideration. Salesforce expects to fund the cash portion of the transaction consideration with a combination of new debt and cash on Salesforce’s balance sheet. The firm has already obtained a commitment from Citigroup Global Markets Inc., Bank of America and JPMorgan Chase Bank for a $10 billion senior loan. While the boards of both companies approved the deal, Slack will be required to pay Salesforce $900 million if directors change their recommendation or back out to accept another proposal.
BofA Securities, Inc. is serving as exclusive financial advisor to Salesforce and Wachtell, Lipton, Rosen & Katz and Morrison & Foerster LLP are serving as legal counsel to Salesforce. Qatalyst Partners LP and Goldman Sachs & Co LLC are serving as financial advisors to Slack. Latham & Watkins LLP and Goodwin Procter LLP are serving as legal counsel to Slack.
Deal Rationale
The plentiful offer is a striking signal of the importance and value that Salesforce sees in Slack. As can be read in the press release, the combination of the two companies will “create the operating system for the new way to work” with perfect integration of Slack in the biggest Customer Relationship Management (CRM) platform worldwide. Slack will become the new interface for Salesforce customers, adding to the existing package an additional communication feature for which Slack is renowned. Salesforce had already tried to build a similar tool in 2010, known as Chatter, that never really convinced the market.
The main purpose of the deal is therefore to exploit the complementarity of the two companies’ services – customer relationship management and all-around communication – to offer a comprehensive product to the customer. This transaction will also enable both companies to team up in order to compete against Microsoft for pole position in one of tech’s hottest areas.
From Slack’s perspective, the deal provides an opportunity to expand the corporate footprint, as entering Salesforce’s network translates into customers such as Starbucks, Target as well as leading academic institutions and even governments.
References
FactSet, NYTimes, Investor.salesforce.com, Slack, Barrons, Global Cloud Computing Marketline, US Cloud Computing MarketLine
To contact the authors
Paolo Mazzi
Bocconi Students M&A Circle 