Salesforce's Cloud Prowess and High Cost Pose Dilemma for Microsoft

Would Buying Make Sense for Microsoft?

By Dina Bass

(Bloomberg) –- As Microsoft Corp. mulls whether to launch a bid for Inc., it will have to weigh the benefits of a big expansion in cloud computing against the drawbacks of a high price and a costly, time-consuming integration.

Microsoft is pondering a move after Salesforce was approached by another company as recently as April, said people with knowledge of the matter. Salesforce, with a market value of almost $50 billion, is working with two bankers to determine a response, two of the people said. Microsoft isn’t in talks with Salesforce and no agreement is imminent, the people said.

The deal would give Microsoft an additional $6 billion in annual cloud revenue, make it the biggest provider of Web-delivered software and hand it the lead in customer-relationship management programs. Even so, Salesforce would be a challenging acquisition for Microsoft or any bidder.

Only a handful of companies -- among them Oracle Corp. -- could digest a deal of that size, said Mark Moerdler, an analyst at Sanford C. Bernstein & Co. It would be expensive and complex, resulting in a hit to margins from money-losing Salesforce and integration costs during the lengthy process of combining the businesses, he said.

“It will take longer, cost more and have more problems, so for someone to do it there has to be significant synergies,” Moerdler said in an interview. For Moerdler and some Microsoft shareholders, that’s money they’d rather see used to pay for a higher dividend or share repurchase, he said.

The vast majority of Microsoft’s $95 billion in cash and short-term investments is held overseas, so another consideration would be the taxes owed if money were brought onshore to pay for the purchase of a U.S. company.

Nadella’s Interest

Microsoft’s Satya Nadella had been interested in acquiring Salesforce before he was named chief executive officer, when he was head of the company’s server and cloud unit, according to a person with knowledge of the matter. Nadella brought up the idea during a meeting of the senior leadership team under then-CEO Steve Ballmer, the person said.

Tony Imperati, a spokesman for Microsoft, and Chi Hea Cho, a spokeswoman for Salesforce, declined to comment.

On the benefit side, acquiring one of the leading cloud companies would significantly bolster Microsoft’s own ambitions and revenue in that market as Nadella remakes Microsoft, seeking to lessen the company’s focus on the declining personal-computer industry.

Cloud Vision

“This combination could make a ton of sense given Microsoft’s laser-focus around CEO Satya Nadella’s cloud/mobile vision and would further highlight the company’s move away from the status quo,” wrote Daniel Ives, an analyst at FBR Capital Markets & Co., in a note sent to clients Tuesday.

Redmond, Washington-based Microsoft would be able to sell Salesforce products using its distribution network to its worldwide customer base, Ives said. There are also many ways to combine them to save money and allow Microsoft to cut costs in the future, he said.

Nadella used to run the company’s customer-relationship management business. Executives told analysts last week their goal was to have annualized corporate-cloud revenue of $20 billion in the fiscal year that ends in June 2018. Buying Salesforce would be a big step toward that target.

Culture Challenge

Yet the challenges of merging two companies with different cultures would be significant, as would the likelihood that many Salesforce executives and employees would use an acquisition as a chance to cash out their stock options and leave, Moerdler said.

“The risks might significantly outweigh the rewards,” he said. “I think they are just kicking tires because there’s an opportunity to kick the tires.”

Ives regards Oracle, the largest maker of database software, as the more likely acquirer for Salesforce, having the most to gain from such as deal and the most to lose “if it falls into enemy hands.”

Last week, Oracle co-CEO Safra Catz said an acquisition of San Francisco-based Salesforce would create disruption in the software market. She declined to comment on whether Oracle was interested in buying Salesforce.

Ives also said Inc., whose data-center business is the largest provider of cloud-computing services, could be interested. Craig Berman, an Amazon spokesman, didn’t respond to requests for comment.

Microsoft CRM

Microsoft’s interest in Salesforce goes even further back. Before opting to build its own CRM software in 2003, Microsoft considered acquiring the cloud-software maker, Salesforce CEO Marc Benioff told reporters at a breakfast meeting in Seattle in the early part of the last decade.

The two companies maintained a testy relationship for years after, until Nadella’s ascent to Microsoft CEO last year gave Benioff a chance to change his mind, he said last May, when the two companies announced a wide-ranging software compatibility agreement.

Similarly, Oracle’s relationship with Salesforce has thawed in recent years, with the companies reaching a sweeping nine-year technology deal in 2013.

“We view this all as a ‘game of high-stakes poker’ with all the major tech players now vigorously trying to figure out their next move,” Ives said.

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