MorningWord 5/26/15: Salesforce a’Twitter

by Dan May 26, 2015 9:45 am • FREE ACCESS

Friday afternoon CNBC’s David Faber confirmed the speculation surrounding a potential bid by Microsoft (MSFT) for (CRM):

Microsoft and had significant talks earlier this spring about a purchase of Salesforce by Microsoft, according to a number of people familiar with the situation. While the two sides failed to reach a deal and have not re-engaged, the talks advanced to a level of detail that indicates they were serious.

Ultimately, the two companies remained far apart on a price, with Microsoft said to be willing to offer roughly $55 billion for the company, while its founder and CEO Marc Benioff is said to have kept raising his expectations to as high as $70 billion.

What’s fascinating about the report is that it confirms what some of the star tech journalists have suggested since the rumors first hit in April. CRM CEO Benioff would sell at a price, but likely only a really stupid one.  MSFT has been down this path before with what would have been a mega acquisition of Yahoo (YHOO) back in early 2008, with the price tag that would have topped $50 billion if MSFT were to have pulled the trigger.  In hindsight this was a good miss for MSFT as YHOO will have sales of 20% less in 2015 than they did in 2008.  But the argument for a YHOO deal then, or a CRM deal now was not about the existing sales of the target (YHOO had less than 10% of MSFT’s annual sales back in 2008, while CRM’s is a little more than 4% now), its about the platform, expanding their existing reach, and how to best do it, build vs buy.  If MSFT CEO Satya Nadella overpaid for one of the largest and clearly most expensive cloud companies on a valuation basis, he would have a target on his back for the rest of his tenure.

Which brings me to another often rumored tech deal. Over the weekend Business Insider ran the following story:

There is a crazy theory going around Prague that says Google will acquire Twitter

Aside from the reporter thinking the theory is Crazy, there is nothing new here.  But it does highlight what I (here and here) and others have been very vocal about… that while Twitter’s (TWTR) user growth appears to have come to a halt, it is still one of the most relevant social networks on the planet, and its platform and scarcity value are the reason a company like Google (GOOG) should have a property like TWTR under its umbrella, to expand its own reach and add leverage to their own suite of services. TWTR’s $2.2 billion in expected sales this year is a mere 3.5% of GOOG’s expected $60 billion, but the potential synergies for GOOG to add a social network, which for all intents and purposes they don’t have, a mobile messaging service which they don’t have, and fill the growing gap of real time search could be massive.  Value creation is the name of the m&a game.  TWTR’s $24 billion market cap, $3.5 billion in cash and $1.6 billion in debt likely places an agreeable deal up near $40 billion.  I think it is safe to say that TWTR’s potential is far greater than that of YHOO’s back in 2008 and if GOOG is going to continue to hoard cash, currently $70 billion, and not buyback shares or pay a dividend I could not think of a better time to consider a transformative deal as a new CFO joins the search behemoth today from a Wall Street bank.

I am long TWTR, and frankly the stock acts so poorly I will likely cut the position in half on a break of $35 (and replace with defined risk exposure as I did prior to Q1 earnings (here), playing for a takeover is not exactly a sound investment strategy, even one like this that would make so much sense and that could result in a bidding war.