Why Slack could sell: Microsoft is rampant

In the middle of last year, when Slack went public on Wall Street, cloud-based software company Salesforce applied a slide rule on the company to see if it should attempt an acquisition.

His take at the time, according to someone familiar with his thinking: Slack, the pioneer of a new form of workplace communication and collaboration software, faced business challenges that made its actions show. overpriced. If Salesforce were patient, there would probably be a better time to buy.

That moment may have finally come. Salesforce is currently in talks about buying Slack, setting up a showdown with Microsoft that could shape the way software is used by many office workers around the world.

For Marc Benioff, CEO of Salesforce, the wait seems to have been worth it. His company’s shares have jumped 57% in the 17 months since Slack’s IPO, even allowing a 5% drop on Wednesday on the news of trading. This left him with a much stronger currency for a deal that would have to be paid for largely in stock.

In contrast, Slack shares had fallen by almost a quarter in the same time frame, before news of the potential deal blew them up.

While Slack’s fortunes have faltered in a year when other cloud software stocks have been a popular commodity on Wall Street, its potential strategic value to Salesforce appears intact.

Created as a new form of channel-based chat service, Slack has grown into a broader work tool. As more and more activities of a typical business are managed through software, the Slack service has become the starting point for a growing range of activities, making it a window to access other apps to do things like start a video conference or track bills.

As a sign of the central position it now occupies in the lives of many workers, Slack says its users spend an average of more than 10 hours a day connected to the service and actively use it for more than 100 minutes.

However, Slack has lost ground this year to a similar service from Microsoft called Teams, in part thanks to Microsoft’s decision to include its service as a free add-on to the widely used Office software suite of tools. . With the coronavirus pandemic forcing workers to adopt new forms of software to communicate, the number of people using Teams every day recently reached 115 million, down from just 20 million a year ago.

Slack, more complex software that has less immediate value as a pure communication tool that allows workers to stay in touch, has grown much slower. It does not disclose the number of users, but indicates that 130,000 organizations are now paying for its service, a 30% increase from last year.

Slack has also lost customers, with small businesses in particular struggling this year. Stewart Butterfield, its chief executive, argued that contracts with new customers over the past few months have put the company in a good long-term position, but that the delay in recognizing revenue on cloud transactions like this ci means it will experience a marked slowdown in income before then.

For Benioff, meanwhile, an acquisition would cap a series of deals aimed at expanding his company’s grip on day-to-day working life, putting him more in conflict with Microsoft.

Salesforce paid $ 6.5 billion for MuleSoft, a cloud apps and data integration tool, in 2018, and an additional $ 15.7 billion for Tableau, a data visualization service, the following year. But he lost a bidding war for LinkedIn to Microsoft, and Mr. Benioff subsequently stretched Wall Street’s patience with an effort to buy Twitter. Three months ago, he went out of his way to reassure investors, saying software vendors’ valuations had reached such a high level that Salesforce was unlikely to be an acquirer.

Slack’s stock price underperformance could make this an exception, but Wall Street is still concerned. Fears that a deal would dilute Salesforce’s earnings per share wiped $ 12 billion from its market value on Wednesday. But even a 40% premium – roughly what Salesforce paid for its last two major acquisitions – would be justified if it produced the kind of lift Salesforce got from its MuleSoft deal, according to Derrick Wood, an analyst at Cowen.

Teams’ success has added to the urgency for Mr. Benioff to act. Microsoft’s service has become an effective tool for directing users to the company’s other applications, including its customer relationship management software, which competes directly with Salesforce’s core business.

Microsoft has succeeded by tightly integrating Teams into its larger cloud computing platform, tying workers more tightly to its other software. This is one of the reasons Slack put forward for filing an antitrust complaint with the EU earlier this year, saying it was being unfairly pressed by Microsoft.

In contrast, Salesforce could consider using Slack as a “front-end” for a more open set of cloud software tools, according to a person familiar with his thinking. It would connect to services like Salesforce’s own CRM, while continuing to assemble widely used applications from other companies.

Mr. Benioff has already had some success integrating companies like this into Salesforce’s expanding software portfolio, with the entrepreneurs behind them. Bret Taylor, one of the founders of Google Maps, joined Salesforce after acquiring his own cloud collaboration company, Quip, and became its chief product officer. The former CEOs of Tableau and MuleSoft are also still with the company.

A key question now is whether Mr. Butterfield is ready to give up his own dream of building an independent rival for Microsoft and get started with Mr. Benioff.

Thanks to a special class of voting shares, Mr. Butterfield’s personal stake in Slack, currently valued at $ 1.6 billion, gives him almost 22% of the vote, and he still controls 20% of the votes through a series of agreements with other shareholders. . An additional 26% voting interest is held by Accel, a leading venture capitalist, adding to the concentration of ownership.

Mr. Butterfield’s last experience selling a business he co-founded did not end well. Flickr, the photo-sharing site Yahoo bought in 2005, has become a slogan in Silicon Valley for why entrepreneurs should resist the sale. Yahoo failed to capitalize on the revolutionary service, and Mr. Butterfield described his subsequent period on the Internet portal as a low point in his professional life.

However, as Microsoft is on the move and its latest business loses momentum, however, tying into Salesforce has perhaps become one of the best options for ensuring Slack remains an integral part of working life.