Salesforce co-CEO Mark Benioff speaks at the grand opening of the Salesforce Tower in San Francisco in May 2018.
David Paul Morris | Bloomberg Getty Images
The tech industry has announced some hefty deals during the 2020 epidemic, involving tens of billions of dollars. But not in software.
Which may change soon. Salesforce, which has been one of Tech’s biggest acquaintances in recent years, is in talks to buy Slack, CNBC and other media outlets reported on Wednesday. Slack shares rose nearly 38% after the initial report, taking its market cap to $ 23 billion.
It will be one of the largest software acquisitions ever made, and possibly the largest IBM purchase of Red Hat for $ 34 billion, announced the purchase in 2018.
The lack of large software deals this year reflects the very high growth the industry has experienced during epidemic-induced remote work in the last eight months. Once niche products and applications have become more popular and have seen increasing demand, stock prices on the public market have increased and investment from private companies has increased.
Zoom and Shopify are each worth more than $ 125 billion, Twilio is valued at $ 50 billion and Snowflake has a market cap of around $ 90 billion, which decreases three months after going public.
In contrast, the semiconductor industry has consolidated, with the top players capturing the bulk of developments in cloud and mobile devices. Announcing two of the three biggest acquisitions in the chip industry so far, Nvidia and AMD have been able to open their wallets.
Nvidia said last month that in a $ 40 billion deal she was buying arm from SoftBank, AMD agreed to buy Exilinx in September for $ 35 billion. Both deals still have regulatory hurdles to overcome.
Like other software companies, Slack has benefited from the work-from-home boom. However, the competitive environment has become much more intense simultaneously, particularly from Microsoft teams, causing investor concern about Slack’s growth prospects and margins.
Microsoft includes teams with a subscription to the Office 365 suite and has greatly promoted chat and video service this year. CEO Satya Nadella said last month that the teams now have 115 million daily active users, up from 75 million in April.
“With Salesforce’s distribution and sales capabilities, Slack will be immediately brought into C-level executive discussions across industries,” RBC analyst Alex Zukin, who has equal sales ratings on Salesforce and Slack, wrote in a note on Wednesday.
A Salesforce spokesperson declined to comment and Slack representatives did not respond to requests for comment.
Microsoft’s growth has put pressure on Slack shares in recent months. Prior to Wednesday’s pop, Slack’s stock was down 14% from its peak in June, while the S&P 500 was down 17% over the same stretch. According to Bessemer Venture Partners’ Nasdaq Emerging Cloud Index of 54 cloud software shares, Slack has an enterprise value to forward revenue ratio of 20.5, lower than the 14 others on the index and 5 points below average.
Microsoft and S&P 500 vs Slack
“The acquisition by Salesforce will give Slack more opportunity to compete against Microsoft teams for wall-to-wall enterprise deployments,” Zuk wrote.
Based on Slack’s current market cap, it would be Salesforce’s largest acquisition of more than $ 14.8 billion last year to buy data visualization software company Tableau.
The deal also had a Microsoft angle, as the tableau competes with Microsoft’s Power BI. From Salesforce and analytics tools to collaboration, Salesforce and Microsoft have become several important rivals of the enterprise software landscape in recent years. Salesforce tried to buy LinkedIn and wound up in a bidding war against Microsoft, which in 2016 paid $ 27 billion for the business networking site.
Salesforce-Slack Chatter does not expect a wave of mergers and acquisitions to kick in. Public investors still have a hunger for high-growth software companies that have filled the IPO pipeline with cloud-based developers who are ready to hold high multiples when they come to market.
Asan, Palantir Snowflake and Unity all went public in September. Bankers and investors told CNBC that at least a dozen software companies could raise $ 1 billion or more in offerings next year, though some may choose to go public through direct listings.
Watch: Salesforce acquiring Slack will be a ‘no brainer’