Using Porter’s five forces framework, the necessity to acquire Slack becomes evident for Salesforce. The key factors within Porter's five forces model in the Customer Relationship Management (CRM) market include the Bargaining power of Customers and the Competitive Rivalry. Due to the wide range of CRM providers, customers had an abundance of choices, meaning Salesforce needed to continually innovate and offer superior products to retain and grow customers. Furthermore, the competitive rivalry in the industry was intense among players like Microsoft, Adobe, Intuit, and Oracle, with Microsoft especially gaining a firm grasp of the market through their Microsoft Teams product (Zaveri, 2020).
Salesforce had identified a weakness in their communications product, and it was crucial for them to fully compete with Microsoft in the short-term in terms of revenue, but even more so in the long-term, in an ever-changing CRM market heavily impacted by AI technologies and remote work culture (Bradshaw, 2020). To combat this, Salesforce launched the Salesforce Anywhere app (Dignan, 2020), but this product came very short of Microsoft’s 30 million users and Slack’s 10 million active users (Curry, 2023). As Salesforce deemed that a prominent collaboration and messaging app was crucial to achieving dynamic consistency in this CRM market, from a competitive perspective, acquiring Slack strategically aligned.
In evaluating Salesforce’s acquisition of Slack from a financial perspective, we observe that Slack realized a substantial compound annual growth rate (CAGR) of approximately 70% from FY 2017 to FY 2021, with its revenue increasing from $105 million to $902 million in four years (Exhibit 8). This impressive growth underscores Slack’s expanding market presence and potential for future revenue generation. However, despite these robust revenue figures, Slack’s profitability has been a concern. The company consistently reported net losses, decreasing from $568 million in FY 2020 to $292 million in FY 2021 (Exhibit 2). These losses primarily stem from high Selling, General, and Administrative (SG&A) expenses and Research and Development (R&D) costs, indicating significant investment in growth and competitive market positioning. In contrast, Salesforce demonstrated consistent profitability, with a net income of $4 billion in FY 2021, reflecting its effective cost management and established business model (Exhibit 1).
When considering the value of the acquisition, Slack’s high gross margins, hovering around 87%, signal a strong underlying business model. However, the substantial operating losses due to high SG&A and R&D expenses present a riskier financial profile (Exhibit 2). In contrast, Salesforce’s healthier operating margins suggested a more stable financial footing, capable of absorbing the financial risks associated with acquiring a high-growth yet unprofitable company like Slack. In the high-growth software sector, traditional valuation multiples like EV/EBITDA, EV/EBIT, and P/E are less applicable due to these companies’ focus on market expansion and technological advancement over immediate profitability. This strategic choice leads to significant investments in R&D and marketing, impacting short-term financials while aiming for long-term valuation growth. As such, the comparable multiples for these values are negative and not a strong indicator of value (Table 7C, Exhibit 7). Therefore, using the median EV/Sales multiple, Slack’s implied market value from comparables is approximately $20.88 billion. Interestingly, Salesforce acquired Slack for $27.7 billion, substantially over its estimated market value. This indicates that Salesforce paid a 33% premium (Exhibit 7). Under the assumption that Salesforce’s purchase was evidence-based and rational, they anticipate significant synergistic benefits from the acquisition, expecting Slack's integration into Salesforce’s ecosystem would yield greater value than simply the sum of the two firms profits.
The anticipated synergies from the acquisition are expected to be substantial. Salesforce aims to create a digital HQ for success from anywhere, combining its “#1 CRM” with Slack’s innovative enterprise communications platform (Salesforce, 2021). This strategic union is projected to redefine enterprise software, providing a single source of truth for business operations and a unified platform for employee, customer, and partner engagement (Salesforce, 2021). The combination of Salesforce and Slack also brings together two of the software industry’s most dynamic communities, creating an open and extensive ecosystem that will deliver the next generation of digital-first apps and workflows for business. Furthermore, this merger could potentially fuel exponential growth (Slack, n.d.). By leveraging Salesforce’s cloud software, a unified, accessible, and flexible business management platform is formed. Simultaneously, Slack’s collaborative features can enhance team communication and cooperation, fostering unprecedented levels of efficiency in businesses.
The acquisition’s impact on Salesforce’s capital structure is a mix of cash and equity, significantly altering its financial profile (Exhibit 3; Exhibit 5). With increased liquidity and debt, Salesforce navigates a balance between leveraging growth opportunities and managing financial risks. This strategic shift introduces higher financial risk due to increased leverage, counterbalanced by Salesforce’s strong liquidity position.
However, the financial risks associated with the acquisition are multifaceted. Salesforce’s decision to pay a 33% premium for Slack hinges on the prospect of achieving substantial revenue synergies. This introduces the possibility of not realizing these synergies within the expected timeframe or to the projected extent, leading to concerns about whether Salesforce may have overpaid for Slack (Reuters, n.d.). To justify the premium paid, the integration of Slack into Salesforce’s ecosystem demands meticulous execution to unlock the full benefits of the merged platforms. Furthermore, Salesforce’s increased debt incurred to fund the acquisition presents a challenge to its credit standing, necessitating prudent debt management to ensure fiscal health (Focus Finance, 2021). The company also faces the task of managing the potential equity dilution for current shareholders, which could result from the issuance of new shares during the transaction (Focus Finance, 2021). Moreover, the increased debt could strain Salesforce’s current assets and cash reserves, necessitating efficient asset management to maintain liquidity and ensure smooth operational continuity.
A strategic risk for Salesforce would be the potential disconnect between the leadership’s vision and the actual execution of operations, which could jeopardize the success of the M&A. Salesforce’s acquisition of Slack presents both an opportunity and a risk; the opportunity lying in enhancing Salesforce’s product suite with a leading communication platform, while the risk involves ensuring the integration aligns with Salesforce’s strategic objectives without disrupting its core CRM business. This move, while potentially expanding Salesforce’s market presence and customer engagement capabilities, requires careful management to avoid diluting the company’s focus or overextending its resources in a market where Microsoft is also aggressively innovating.
Looking at the acquisition three years later, Slack’s revenue growth has steadily declined, where Salesforce reported about $402 million in Slack subscription and support revenue in the fiscal third quarter ending Oct. 31. That is quarter-over-quarter growth of 6.9%, but it reflects a slowdown from 9.3% growth in the second quarter and 11.7% growth in the first quarter, based on revenue figures from the company’s earnings reports (Loten, 2023). Considering that Salesforce was meant to grow Slack’s revenue immensely by giving access to its current Salesforce product users, along with Salesforce’s enormous Marketing budget, the emergent properties beyond a simple sum of revenues have not been noticed. While Microsoft Teams has grown to 300 million active users, Slack only has 38 million as of 2022 (Curry, 2023), where the growth trajectories in the two products can be noticeable.
Overall, this acquisition was significantly overvalued at a 33% premium, and the short-term yields have not looked great, yet this acquisition was necessary for Salesforce to achieve its long-term strategy of creating a digital HQ. Strategically, it simultaneously acted as a preventive move from Microsoft acquiring Slack (Waters, 2020), which would have led Microsoft to dominate this CRM market long-term when combined with their existing Microsoft Teams product (Curry, 2023). The final evaluation of this acquisition will hinge on Salesforce’s ability to make an immersive customer experience to become more competitive with Microsoft, increasing the valuation of its own company significantly in the process.
