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Microsoft Makes Nice With Salesforce.com -- Here's Why

By Alex Dumortier, CFA - May 30, 2014 at 10:15AM

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Microsoft CEO Satya Nadella continues to break with his predecessor's style

After achieving (another) record high yesterday, U.S. stocks are roughly flat in early trading Friday, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (^DJI 0.03%) up 0.04% and down 0.11%, respectively, at 10:30 a.m. EDT. In company-specific news, Microsoft (MSFT -0.23%) and customer relationship management software specialist salesforce.com (CRM 2.60%) announced yesterday afternoon a "global, strategic" partnership. Salesforce shares are down 0.80% in early trading Friday, but the announcement may be more significant for Microsoft.

As a former software industry sales executive, I can confirm that "strategic partnerships" between enterprise software vendors are a dime a dozen. In fact, less than two weeks ago, Microsoft and Salesforce competitor SAP announced that they had expanded their "global partnership" to provide access to SAP tools on Azure, Microsoft's cloud platform, as well as increased interoperability with Microsoft applications.

However, Microsoft and Salesforce apparently consider this deal significant enough to merit a conference call in order for the CEOs of both companies to sell the benefits of the partnership. The agreement is certainly more than an exercise in co-marketing, as it actually required developing compatibility between Microsoft's Windows environment and applications and Salesforce. However, why trumpet this deal rather than the one with SAP, which is a much bigger company?

For two reasons, I think:

  • Under former CEO Steve Ballmer, Microsoft had a contentious relationship with Salesforce. In 2010, Salesforce CEO Marc Benioff called Microsoft the "evil empire," adding that "there's an old industry ... and they're trying to do everything they can to stop [Salesforce's advance in cloud computing and cloud customer relationship management]." In a jibe at Salesforce, Microsoft was then running ads with the tag line: "Don't Get Forced, Get What Fits."

By extending an olive branch to Salesforce, new Microsoft CEO Satya Nadella is signaling a break with Ballmer's aggressive "take no prisoners" approach to the industry. The move also suggests that Nadella recognizes that, in a world that is shifting toward mobile devices, Microsoft is no longer the default operating system and must, therefore, adopt a different attitude toward its comopetitors. This is consistent with Microsoft's March introduction of the Office suite on the iPad, something it had long resisted.

  • Furthermore, Salesforce.com is one of the pioneers of cloud-based computing, whereby companies access a software application hosted on a third-party's servers via a Web interface. Nadella is leading an energetic drive toward cloud computing at Microsoft; at the inaugural Code Conference this week, he referred to Microsoft as a "cloud and mobile-first company." Teaming up with Salesforce.com bolsters its credibility in and commitment to this area.

I have been enthusiastic in my praise of Nadella so far -- he is a welcome change from the Ballmer regime. This latest news is more evidence of the change in leadership style and confirmation that the new CEO understands that the world has changed and that Microsoft must change with it to remain relevant.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,261.90 (0.03%) $8.77
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$252.56 (-0.23%) $0.58
salesforce.com, inc. Stock Quote
salesforce.com, inc.
CRM
$159.65 (2.60%) $4.05

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