Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Before they head home for the weekend, Salesforce shareholders should take a moment to write a thank-you note to Microsoft CEO Satya Nadella. I'll even write the text. 

Dear Mr. Nadella,

I hope you're doing well. I read with interest the Bloomberg News article about Salesforce's attempt to purchase LinkedIn, before Microsoft and its big balance sheet won the day. Thank you for making sure it was Microsoft that committed $26 billion to buy LinkedIn and not Salesforce. Whew, that was one expensive deal

Anyway, I hope LinkedIn works out better for you than the acquisition of Nokia. Or Skype. Or aQuantive. Or Yammer. P.S. I liked the black polo shirt you were wearing the other day. Do you mind if I ask where you bought it?

It is a lovely narrative twist that Salesforce CEO Marc Benioff lost out on a mega acquisition to Nadella, the man who might have been Benioff's boss if Microsoft had pulled off its own mega purchase by swallowing Salesforce

We don't know how much Salesforce was bidding for LinkedIn, but it's tough to imagine Salesforce could compete against the financial firepower of Microsoft. Its $31 billion in cash from operations over the last year is equivalent to about 16 years' worth of Salesforce's operating cash. 

Unfair Fight
In the deal for LinkedIn, Salesforce got outgunned by Microsoft, which generates 16 times the cash from operations of its rival
Source: Bloomberg

But the fact that Benioff was in the mix at all shows that he's willing to commit somewhere in the neighborhood of half of Salesforce's market value for a huge acquisition that would have pushed his company into entire new lines of business.

The majority of LinkedIn's revenue comes from selling software to human resources departments and corporate recruiters -- areas where Salesforce has little experience. Benioff's eagerness to make a massive and risky splurge on LinkedIn should give shareholders pause.

In fairness, Salesforce has always made clear it is a roll-the-dice company that is focused on growth at the expense of profits . We wrote recently about how Salesforce gets the benefit of the doubt from shareholders for pricey acquisitions and for spending about half of its revenue on salaries, stock compensation and other costs for the company's army to sell and market Salesforce software. 

Salesforce bulls have been rewarded by shares that trade about 30 times the price of Salesforce's 2004 IPO, outdoing another little tech company called Google that went public the same summer. Salesforce has also used acquisitions to fuel a mostly successful diversification. Salesforce's stock price was down roughly in line with a tech stock index in early Friday trading, showing Salesforce stockholders are relatively unperturbed by the company's interest in buying LinkedIn.

It's good Salesforce missed out on the LinkedIn deal. While Microsoft is getting a company that is growing much faster than it is, LinkedIn's expected revenue growth is about the same as Salesforce's. And though many sales departments use Salesforce's software in tandem with LinkedIn to scout potential customers, it's tough to see much benefit in merging the two. 

But the technology industry is getting split into the haves and have-nots, and the biggest companies have the money and ability to spend whatever it takes to keep and extend their position. The tech industry's Big Five -- Apple, Google's parent company, Microsoft, Amazon and Facebook -- have a combined stock market value of more than $2 trillion, and each has an unassailable position in at least one corner of technology.

Can't Touch This
The Big Five tech companies have a combined market value of $2 trillion, and they dwarf even other megacap tech firms
Source: Bloomberg

That's why Facebook wasn't afraid to pay a crazy amount of money for WhatsApp, which was hardly generating revenue. That's why Google is willing to lose piles of money to build telecom networks and supercomputers that can beat humans in complex board games. And that's why Nadella and his board were willing to overspend on LinkedIn, and took a chance on buying Salesforce before that.

The technology industry is now a high-stakes poker game where only a handful of companies can afford the buy-in. Salesforce is at the point in its history where it has to decide whether it can play with superpowers, or maybe capitulate to one of them.  The flirtation with a LinkedIn purchase shows Benioff wants to be among the tech world powers. Shareholders should consider whether they're comfortable staking him to stay at the table. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Salesforce generates plenty of cash from operations, but it hasn't turned an annual profit for the last five years under conventional accounting standards.

  2. Admittedly, there are really only three companeis -- Microsoft, SAP and Oracle -- that are likely buyers for Salesforce. 

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net