It was less than two weeks ago when I speculated (as many others have as well) that Salesforce.com (NYSE:CRM) was preparing to do an acquisition to expand and build its marketing cloud capabilities. At the time I also suggested that cross-channel digital marketing specialist ExactTarget (NYSE:ET) could be a credible target. On Tuesday morning both of those predictions came home to roost, as Salesforce.com announced an all-cash bid for ExactTarget.
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The Deal To Be
Assuming that the companies get all of the requisite approvals, Salesforce.com will acquire ExactTarget for $33.75 per share in cash, or a total deal value of $2.5 billion. That price is not only a 53% premium to the Monday closing price of ExactTarget, but almost a quarter higher than the stock's all-time high shortly after its IPO.
Upon the close, ExactTarget will fit into Salesforce.com's Marketing Cloud offerings alongside prior acquired businesses like BuddyMedia (which Salesforce.com acquired for nearly $700 million) and Radian6 (acquired back in 2011). This will further round out Salesforce.com's marketing offerings, expanding the company into the email/multi-channel marketing area where it will compete with others like Constant Contact (Nasdaq:CTCT), Responsys (Nasdaq:MKTG), and Experian.
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An Expensive Deal, But Maybe Not As Expensive As It Seems?
At $33.75 per share, Salesforce.com is paying a trailing EV/revenue multiple of almost 8x. That's not inconsistent with past acquisitions in this space made by Salesforce.com, Oracle (Nasdaq:ORCL), or SAP (NYSE:SAP), even if the deal was at a premium to sell-side price targets (many of which including some expectation of a takeout).
Although this price is a great deal higher than my stand-alone fair value estimate for ExactTarget, I'm not going to flog Salesforce.com for the price paid. Part of the problem with ExactTarget's stand-alone valuation was the lack of operating leverage (particularly SG&A leverage) that is endemic to the cloud space. Salesforce.com, though, should be able to strip out a lot of those costs as it folds the company into its preexisting Marketing Cloud business and leverages its own sales and administration infrastructure. So while the deal will be dilutive to Salesforce.com in fiscal 2014, I don't believe it will be nearly so expensive on a long-term basis, particularly given Salesforce.com's experience and demonstrated proficiency in integrating acquired businesses.
More Left To Do?
Expanding into cloud-based multi-channel marketing makes sense for Salesforce.com, but I don't necessarily think this is the last move that the company will make. ExactTarget does offer analytics and automation capabilities, but it seems like the company generally gets less credit there than others like Marketo (Nasdaq:MKTO), NeoLane, and HubSpot. Perhaps that means that Salesforce.com could still look to beef up its analytics and/or automation abilities with further deals, or maybe the company will simply work to enhance what ExactTarget already brings to the table.
Given the scale of this deal, internal development/improvement seems more probable. Salesforce.com has done more than a dozen deals since April of 2010, with a total payout of nearly $1.7 billion in cash and stock. As this single deal is almost 50% bigger than those trailing three years of deals, I'd argue that Salesforce.com has bitten off quite a lot to chew and probably shouldn't be looking at additional major deals any time soon.
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The Bottom Line
Salesforce.com's stock hasn't come down much on this news, though the stock has lagged the market over the past year and has been weak from time to time in 2013 mostly on fears of a big deal. All in all, it seems like the market accepts moves like the ExactTarget acquisition as the price of building a business to compete with the likes of Oracle, SAP, and IBM (NYSE:IBM) for the long term.
I thought Salesforce.com was expensive prior to this deal, and while the transaction is logical it doesn't change my estimate of Salesforce.com's fair value enough to change my basic opinion on the stock. While Salesforce.com is an interesting company, and I do enjoy the conniptions its valuation seems to inspire in its critics, detractors, and short sellers, I don't see the need to own these shares at this time or price.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.