At a premium of slightly more than 50%, it's not surprising that salesforce.com's (NYSE:CRM) decision to acquire cloud marketing specialist ExactTarget (NYSE:ET) wasn't greeted with cheers from investors. The aggressive move by Salesforce CEO Marc Benioff to drop $2.5 billion on a company that has issued revenue guidance of just $376 million to $379 million for the year seems a bit much, and based on Salesforce's share price drop at the open, the market agrees. But don't be too hasty to abandon Salesforce shares -- there may be a method to Benioff's madness.
Who are these guys?
Prior to the acquisition announcement, ExactTarget was a $1.53 billion cloud-based digital marketing company losing money and eating into its ready cash, even as it consistently grew quarterly revenues. (Not surprising, really, when you consider that when ExactTarget was founded in 2000, the notion of cloud-based marketing solutions didn't register even as a blip on the radar.)
But setting its lack of positive earnings aside for a moment, ExactTarget isn't without its successes, most notably its client list. With over 6,000 clients -- including folks like Coca-Cola (NYSE:KO), Nike (NYSE:NKE), and Gap (NYSE:GPS) -- automating digital marketing campaigns represent a rapidly growing market that is only going to get bigger. How much bigger? This is where the acquisition gets interesting for Salesforce.
According to Yvonne Genovese, a managing VP with Gartner, "Marketing was the fastest growing CRM category in 2012, growing at 21% (more than four times the software industry forecast norm in 2012)." Genovese expects marketing "will be the largest growing CRM category through 2017." In the press release announcing the acquisition of ExactTarget, Benioff also alluded to expectations that by 2017, companies' chief marketing officers will spend more on technology than CIOs.
What it does for Salesforce
For Salesforce, the ExactTarget deal is all about providing customers with end-to-end solutions in the exploding cloud digital marketing CRM market. The acquisition provides an immediate inroad into some of the biggest companies in the world, and gives Salesforce additional revenue alternatives with its existing clients.
Naturally, Salesforce will take an earnings hit in its current fiscal 2014 Q2 (and for the year) as it absorbs the expenses associated with an acquisition of this magnitude. For fiscal 2014, Salesforce expects a reduction in non-GAAP earnings by an estimated $0.16 a share, and about $0.05 a share in its current fiscal Q2. Salesforce's revenue expectations for the year, which were in the $3.835 billion to $3.875 billion range, have been revised upwards to $3.955 billion to $4.0 billion.
At nearly seven times ExactTarget's expected 2013 revenue, $2.5 billion is a pretty steep price for Salesforce to pay -- there's no denying that. But the acquisition isn't about this quarter, or even this fiscal year; this deal's about positioning Salesforce for the explosive growth in cloud-based digital marketing over the next five years (and beyond). And from that perspective, investors shouldn't be too quick to condemn Salesforce for the move, but look at it for the opportunity it represents.
Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Gartner, Nike, and Salesforce. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.