At the end of this year’s second quarter, Marc Benioff was adamant that it is a bad time for Salesforce to buy companies.
“We’re not in a good M&A environment,” the Salesforce CEO and chairman told investors during an earnings call in August. “This isn’t part of our plan right now. We don’t see that. We really see focusing on our business.”
So it came as a surprise to observers that Salesforce is in advanced talks to buy Slack, the workplace instant messaging startup. Salesforce is reportedly expected to announce the deal after market close Tuesday when it reports third quarter earnings. It is expected to price Slack at a premium above its current $24 billion market cap, in a half cash, half stock deal.
The deal, which would be Salesforce’s largest acquisition to date, would mark an aggressive push by the San Francisco cloud giant into the workplace collaboration space, a sector dominated by Microsoft that has boomed in the Covid-19 era as workers have been forced to remain connected while working from home.
By acquiring Slack, Salesforce would be going head-to-head with Microsoft’s mammoth collaboration business, which generated over $25 billion in revenue from commercial customers in the past year, according to Mark Moerdler, an analyst at Bernstein. By entering the space, Moerdler says, Salesforce may be prompted to continue making acquisitions in the collaboration sector to complement Slack; for example, document management companies like Box or Dropbox, and video conferencing firms, such as RingCentral.
Slack, which launched in 2013, had largely been credited with ushering in a whole new workplace collaboration sector with its instant messaging app, and was an instant hit with enterprise customers, growing to more than 15 million users. But in 2016, Microsoft introduced its Teams platform, and integrated it with Office 365, making the product available to its more than 115 million users. The competition has become bitter, and earlier this year Slack filed a lawsuit against Microsoft in the European Union, accusing the company of antitrust practices.
Investors and analysts have been lukewarm on Slack this year, as the company failed to meet revenue expectations. Before talks of an acquisition, the bear view of Slack was that it would remain in a “distant second place to Microsoft, which is not a good place to be,” says Moerdler.
Both Slack and Microsoft have loyalty among different users. Microsoft is the favorite among CIOs who say executives prefer Teams’ price point and integration with the Office products, says Brad Zelnick, a Credit Suisse analyst. But, he adds, “When you speak to end users, technical people, digital natives, it’s very often Slack over Teams.”
Buying Slack also would become the second big ticket item Salesforce has acquired over 18 months when it paid $15 billion for Tableau in August last year. Still, observers have questions about Benioff’s about-face. “He literally said it’s unlikely you will see us do large M&A in this environment,” says Alex Zukin, an RBC analyst. “Lo-and-behold, it’s opposite day.”