Here's Why This $27.7 Billion Acquisition by Salesforce.com Was Brilliant

In early December, salesforce.com (CRM -0.18%) announced that it would acquire workplace communication tool Slack Technologies (WORK) for roughly $28 billion. This was by far the company's largest acquisition to date. Investor weren't impressed by the deal, sending salesforce shares down 8% in the wake of the announcement.

On this episode of Fool Live that aired on Dec. 2, 2020 "The Wrap" host Jason Hall and Fool.com contributor Danny Vena discuss the acquisition and why it's a brilliant move by Salesforce.

Editor's note: Danny misspoke in this video. Slack shareholders will receive $26.79 in cash and 0.0776 shares of Salesforce common stock for each Slack share.

Jason Hall: Danny Vena. A lot of interest in the Q&A here, Salesforce, ticker CRM, making the big deal to buy ticker, W-O-R-K which is Slack. Slack of course  rocketed up on the buyout pricing. Salesforce stock is crashed. I'm being ambivalent on this, but I know, you're a big fan. Tell us why you think there is a brilliant deal for Salesforce.

Danny Vena: Let me start by saying that I am not a Slack stockholder. I've always found it to be a useful tool -- we've talked about this before on the show and on many of the Motley Fool Live episodes -- this is a tool that we use here internally. But I've never bought into the idea that Slack would be able to replace email. I must admit that I have been a little bit intrigued by the potential for Slack's new tool, Slack Connect, which essentially would allow Slack capabilities but between companies. So you would be able to connect with your suppliers, for instance, and communicate with them on Slack like we do internally. I thought that that tool might have some legs.

But apparently, the folks at Salesforce -- and Salesforce has a very solid history when it comes to mergers and acquisitions. It seems like every one of the acquisitions that they have made has eventually been successful for them. They haven't taken a lot of writedowns for instance, which we've seen with a number of other companies.

But moving on, Salesforce.com announced yesterday and probably the least well-kept secret of the week that it was going to acquire Slack in a cash and stock deal that was worth just short of $28 billion. It was $27.7 billion. Now this made it Salesforce's largest acquisition ever.

For the details, under the terms of the agreement, Slack shareholders would receive $26.79 in cash and 0.0076 shares of Salesforce common stock in exchange for each Slack share.

As the person in the Q&A mentioned, Salesforce's stock was down on the announcement, and of course, Slack stock rocketed. The last numbers that I saw were that Slack was up about 40% and Salesforce was down about 8%.

Now, the reason that Salesforce stock is down is because we have heard the usual chatter, which happens invariably after any big merger or acquisition. What that chatter says is that obviously, Salesforce must be overpaying for Slack. This is a company that the chatter goes, faces significant competition from Microsoft (MSFT 0.37%) Teams, it has not yet reached a billion dollars in annual revenue, and yet, Salesforce paid something like 19 times forward sales.

Now, not everybody is down on the deal, one analyst who has a pretty solid track record, Brent Bracelin of Piper Sandler, said that Slack actually could be part of an automation and engagement layer on Salesforce's platform and could potentially become a $10 billion business for Salesforce.

There are a lot of pluses and minuses, there's a lot of talking heads that are, of course, throwing their opinions out there.

The thing that I saw that was intriguing, was that Marc Benioff said that he met with Slack's CEO and they had a conversation, and the vision that Slack's CEO laid out for this combination of the two companies and how their tools would work together was so engaging that even though back in August, Salesforce's CEO, Marc Benioff said he didn't see any mergers and acquisitions on the horizon, this actually changed his mind and to the tune of $27.7 billion, so that's a pretty big change of heart over a short period of time.

I read the press release and it said essentially that Slack was actually going to become the new interface for Salesforce Customer 360. The two were already partners, and Slack would be deeply integrated into Salesforce Cloud. It already is to a certain extent because they were partners, but a couple of other things.

Benioff said that layering Slacks technology onto Salesforce 360 made the tool more collaborative and more mobile, he said you can automate any workflow. "It's very cool and very different from anything I've ever seen ... a dream that I've always had that we could have this type of a user interface, and now that Slack and Salesforce are coming together, we do."

A couple of other small points; he noted that 90% of Slack customers are already Salesforce customers, so there's a lot of overlap here, but it doesn't work the other way. Now, there are going to be a lot of Salesforce customers that are going to be hearing from Salesforce and their sales and marketing representatives who are going to be encouraging them, I would say, to add Slack to their suite of tools.

I think this is a really good move for Salesforce.  It's brilliant, in that, they never really had a slick interface, it was OK, a lot of people said just that, it was OK, but it wasn't really slick. And to be honest, the Slack interface is very easy to use, it's widely intuitive, so I think this is a good move for Salesforce. I heard a lot of talk about whether or not they'd be able to create their own Slack-like tool within Salesforce.

There was no reason for them to reinvent the wheel, I think they are going to be able to get enough money out of this deal going forward. It's going to take some time, this is not going to be accretive to earnings anytime soon. But I think that with Salesforce's history of successful mergers, if we look back three to five years from now, I think this will be in that same category.

Jason Hall: The more I think about it, I think this has to be more than they just wanted to get Slack, it's not just about what Slack does now, what Slack is, it's about unlocking more of what Salesforce's CRM tools and other customer service tools that they provide can do and become more powerful and also get deeper roots into every enterprise that they do business with.