The technology industry is full of ‘collaborations’. Established players that are slow to innovate and adapt to increasingly rapid change often invest in, or partner with smaller companies for a whole host of reasons. I suspect the biggest driver is to keep your friends close, and your enemies even closer. Strategic or financial partnership/ investments allow the big guys to keep a close eye on external innovation with a peek behind the kimono. And that can be very useful on the m&a front.
A great example of this was the announced strategic partnership between Microsoft (MSFT) and Salesforce.com (CRM) in May of 2014. At the time MSFT was pushing hard into faster growing businesses at the behest of new CEO Satya Nadella, who formally ran MSFT’s cloud business. At the time of the initial announcement it appeared to be a love-fest between two CEOs who one way or the other were on a strategic collision course. From the press release:
“We are excited to partner with salesforce.com and help customers thrive in a mobile and cloud-first world.” said Satya Nadella, CEO of Microsoft. “Working together we’ll deliver new solutions that connect the customer insights of Salesforce to the cloud productivity of Office 365, cloud platform of Azure and the mobility of Windows, so our customer can do more.”
“Today is about putting the customer first,” said Marc Benioff, chairman and CEO, salesforce.com. “Together with Microsoft, we are building bridges that allow customers to be more productive.”
In September 2015 the two companies strengthened their partnership with the stated goal of:
New Integrations to Make Joint Customers More Productive Than Ever Before
Microsoft and Salesforce have committed to working together to bring the following solutions to life
That’s called tech speak mumbo-jumbo.
But recently, the Bro-mance between Nadella and Benioff came to a screeching halt with MSFT’s $26 billion all cash bid for LinkedIn (LNKD) on June 13th. As part of the justification for the hefty purchase price, Nadella explained to Business Insider:
“This is really all about expanding the opportunity we have, going beyond productivity and collaboration tools to having a professional network. It helps us differentiate our CRM product with social selling. It helps us take Dynamics [Microsoft’s suite of business management software] into new spaces like human capital management with recruiting, and learning, and talent management.”
What becomes increasingly clear with every passing day, is Nadella’s intent with the deal is to push further into CRM’s core competency of SaaS offerings.
As reported by Recode’s Kara Swisher in mid June, right after the MSFT/LNKD announcement, CRM made a run at LNKD. But MSFT’s ability to pay all cash was likely the reason they never really had a shot in a bidding process. Swisher also reported that MSFT had tried to buy CRM earlier in the year but “both price and the way it would be operated within the company were among the issues that resulted in it not happening.” Remember it was widely reported in Spring/Summer 2015 that CRM was entertaining take-over interest, widely believed to be by MSFT but they balked at CRM’s $70 billion price tag.
What got me looking at CRM this morning was the stock’s relative under-performance of late as most large cap tech stocks trade at or near 52 week or even all time highs, CRM is down 6% on the week, down 2% on the year, and down 9% from the late May all time highs. The stock’s poor performance this week started with a couple of negative sell side research reports Monday, signaling the potential for a weak Q2 report when the company issues earnings on Aug 31st.
Stocks like CRM (meaning expensive, trades 80x expected f2017 earnings, 6.3x sales, with universal bullishness, 44 Buy ratings, 2 Holds and only 1 Sell, with short interest at only 2% of the float) can be subject to sharp sentiment shifts when fundamentals decelerate, and that takes away m&a premium. That’s likely the cause for the stock’s recent pause. But taking a quick gander at the one year chart into the Q2 print, the stock halted the recent decline right where it should have at technical support that aligns with its 200 day moving average:
If I were a CRM shareholder, I would have two main concerns, first the potential for a massive sentiment shift if fundamentals were to downshift after a period of strong execution and investors disinterest in such mundane things as valuation. But maybe equally important, faced with the eventual revenue growth deceleration (was 33% in 2014 & 2015, 24% in 2016 and expected to be 24% in f2017) does the company make a large expensive acquisition? The fact that Benioff was willing to buy LNKD for 50% of CRM’s market cap (in cash, stock and debt deal) for a company who sales growth in 2016 is expected to be 26% (similar to its own) at about 45% of their expected f2017 sales should get investor’s antennas up. And I’ll add that CRM’s expected 96 cents in f2017 earnings are only 13 cents on a GAAP basis, while LNKD’s $3.70 in expected 2016 eps is really a loss of $1.23 a share on a GAAP basis!!!
I suspect this was a good miss (of LNKD) on CRM’s part, especially when you consider MSFT’s m&a history (albeit from another CEO) — three words: aQuantive, Nokia & Skype.
We will be sure to circle back to CRM prior to results, with poor relative performance & increasingly bearish near term sentiment, the stock could set up nicely for a defined risk trading opportunity into the print. Stay Tuned.