Salesforce to acquire Slack

saleforce and slack rykov media

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A deal has been agreed for Slack to be acquired by Salesforce for a reported $27.7bn.The news has sent shockwaves through the tech world, since this is now (as of 4th of December 2020) the biggest deal in the software market since the announcement of an acquisition of Red Hat by IBM in 2018 for $34bn.

The big question is: why? What does Salesforce have to do with Slack? And why did the latter fail to capitalise on its own on the pandemic and the WFH trend the same way Zoom did?

Background

Salesforce

  • Founded in 1999 in San Francisco with the vision to become “A World-Class Internet Company for Sales Force Automation.” (i.e. it was one of the first CRM’s widely adopted by other enterprises)
  • Co-founded by: Mar Beioff (current CEO), Parker Harris, Dave Moellenhoff and Frank Dominguez.
  • Went public in 2004 on New York Stock Exchange, raising $100m (USD).
  • Revenue as of January 2020 – $17.1bn

Slack Technologies

  • Started in 2009 (known formerly as Tiny Speck)
  • Last reported quarterly revenue of $234.5 million in December 2020.
  • Main product – a real-life collaboration & messaging app, where communications can be organised into channels and sub-channels.
  • Slack Connect introduced on 24th of June 2020 to let users connect to multiple different organisations within the same Slack channel.

In the software world 10 years means Salesforce is old enough to be Slack’s “daddy”. And on paper, it is bigger and stronger. However, the two haven’t crossed paths much in the past.

Salesforce helps companies keep track of sales funnels and deals + other CRM stuff that small companies usually don’t preoccupy themselves with. Also, it is considered to be something of an old mammoth – yes it is great on paper, but too customizable (too many parts that you can spend a lifetime considering for your enterprise) and takes FOREVER to install.

Slack, on the other hand, very easy to integrate into your organisation, it is much more straight to the point and more importantly – it is cheaper. Salesforce is known to be expensive (after all they have dominated the CRM market for so long and so can dictate the pricing to users).

So why buy Slack now if the two have so little in common?

It is a solid f****** business.

Packy McCormick did a brilliant job here at deciphering Slack’s business model. In his own words: “For 100 companies that are using Slack today, 80 will still be using Slack in year five, and those 80 will spend 2.4x (100*1.25^4) as much as the original 100 did in year one.” To simplify – Slack’s acquisition strategy may look costly on paper, however long-term it has proven to reap its rewards.

Infographic: Slack's Growth Shows No Signs of Slacking | Statista
https://www.statista.com/chart/6643/daily-active-users-of-slack/

Why is this important? Well, for an organisation like Salesforce that has put down a substantial payment for Slack, this “returning” revenue means that the risk in acquiring Slack is more justified. The company is very solid financially, and it has increased its revenue year-over-year at a consistent rate over the past five years.

However, in the world of Teslas and Ubers, slow growth means death to a public company. Unfortunately for Slack, it has not skyrocketed like Zoom during the pandemic. It’s share price has grown from roughly $22 to $42.8, but that is nowhere close to Zoom’s $70 to $559 (at the peak, on 16th October 2020). For investors this is a warning sign – the company and its team are not doing enough to trampoline them and bring that sweet 100x on their investment. So why hasn’t this happened?

An enemy of my enemy is my friend.

Microsoft. The old giant has struck again. Microsoft launched “Teams” that were targeting anyone and everyone who could potentially be using Slack instead. For the past 20 years, Microsoft has been known to destroy some of the most popular products after acquiring them (think Skype or Github), however what it is brilliant at is distribution through its existing network. After all, what better way to recommend a new product to user than through the machine that they are using, right?

Statista reports that the number of daily active users of Microsoft Teams increased from 32 million users to 75 million users from the stat of the pandemic in March 2020 to April 2020. And while the old dog knows all the tricks in the book, and they (allegedly) could be inflating the numbers by including an average user who just opens teams for the first time in that number, it is still impressive… Any investor might then question, whether Slack is capable of fending off this challenge. And the markets have voted “no”.

However, for Salesforce this presented a fantastic chance. An under-priced stock of a profitable company, that is in competition with Microsoft. You might now ask, “what does Microsoft have to do with Salesforce?” After all, both companies seem to be in different markets. WRONG. When you get to a certain level in the software industry, you are bound to clash with some giants, even indirectly.

Remember that little acquisition Microsoft did in 2016 for $26.2bn+ of LinkedIn? Salesforce wanted that deal BADLY. And they lost. In this case, what better way to take Microsoft on than to purchase a software company that is already competing with them (and despite what the markets say, it is good at what it does).

What else is in it for Salesforce

As I mentioned in the piece on Facebook’s recent acquisitions – everyone wants to stay relevant. What better way to stay relevant with the “kids” than to buy a software company that constantly adapts to the market and is not outdated, complex and overpriced easy to use?

Let’s face it – this is not one of those magical integrations where suddenly all Salesforce comms will be on Slack and somehow Salesforce CRM will magically get installed by all Slack users – they are different products. That is despite the optimistic statement by Salesforce, that “Slack will be deeply integrated into every Salesforce Cloud”.

However, it is possible that Salesforce will provide Slack with the necessary distribution channels – and not the other way around – to promote its products to more enterprise users.

Remember the difference in costs between Salesforce and Slack that we went over at the start? Salesforce knows how to upsell its clients. Slack on the other hand so far has been known for its freemium model, and long-term games, where it gets that revenue and more back eventually (see above). With access to bigger clients through Salesforce, it can now start to deviate from this model.

Will it mean less small customers and startups who use it so often? Very possible. Would Salesforce care, if they add another billion in revenue in the net 24 months? Probably not.

In conclusion

The reasons behind Salesforce buying Slack are clear: they have been waiting to take on Microsoft and expand the battleground. They have found an under-priced asset, and they went for it.

The reasons behind Slack selling are not yet fully known. The company could easily continue on its own and still be profitable, growing year-over-year. Is the founding team’s fatigue a factor here? Possibly. Do they see Salesforce as the ultimate “distribution channel” for the company, and hence the sacrifice? Also, possible, but if that was the only reason most likely they would have found other options without selling out.

Whatever the real reasons, time will tell whether it was worth it for Slack – I am sure it will be for Salesforce. I am even going to go on a limb here and say that this “little” guy that is joining Salesforce might grow to swallow up the whole company eventually. Slackforce in 2030 anyone?

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