CRM Stock – Who Will Buy Salesforce?

While the Bloomberg.com story was a bit vague, the response from investors was clear. Salesforce.com, Inc. (NYSE:CRM) stock shot up over 12% on a report that CRM has hired investment bankers to evaluate “takeover offers.”

Salesforce 185A deal may seem kind of outlandish as the market value of CRM stock is about $45 billion, but there is a short-list of companies with enough firepower to pull off an acquisition, such as SAP SE (ADR) (NYSE:SAP), Microsoft Corporation (NASDAQ:MSFT), International Business Machines Corp. (NYSE:IBM) and Oracle Corporation (NYSE:ORCL).

Besides, with interest rates at rock-bottom levels — at least for now — getting debt financing to leverage a transaction would probably not be tough.

There is also desperation for legacy software operators to rapidly transition to a cloud model. Just some of the benefits of the technology include: less need for IT resources and staff because the systems are outsourced; generally better user interfaces; seamless upgrades since all users are on the same code base; and better analytics because there is a single database.

Among the cloud companies, Salesforce remains the gold standard. Founded in the late 1990s, Salesforce’s charismatic CEO, Marc Benioff, worked tirelessly to evangelize the virtues of the cloud. He also spent heavily on research and development to build a secure platform that could handle huge amounts of transactions.

While the initial focus of Salesforce was on customer relationship management (CRM) software, Salesforce has expanded beyond this over the past few years. Whether by internal development or acquisitions, there is now a footprint in fast-growing areas like collaboration, marketing automation, customer service and data analytics.

It helps that the CRM platform allows for third-party development, which has created a thriving ecosystem. Consider that there are more than 2 million developers. Interestingly enough, many breakout companies have leveraged the platform, such as Apttus, Kenandy, ServiceMax and Veeva Systems Inc (NYSE:VEEV).

As for growth, CRM has not slacked off. In the latest fiscal year, revenues jumped by 32% to almost $5.4 billion. Operating cash flows also came to more than $1.2 billion.

Back to the takeover offers — which suitor would make the most sense for CRM? Well, SAP is one that is a long shot. The market cap is relatively low $91 billion, and SAP has already bought several cloud operators. Oh, and on the latest earnings call, management indicated that there were no plans for a mega deal!

IBM may not be a likely suitor either. IBM is in the midst of a major restructuring, which would would mean that a transformative deal would be disruptive.  IBM also has $35 billion in debt and only $25 billion in cash. In other words, it could be a stretch to finance a mega buyout.

This leaves Microsoft and Oracle. Both have huge amounts of resources to get a deal done as well as the need to move more aggressively to the cloud.

Of the two, Microsoft may not really need to buy CRM. After all, Microsoft has already made great strides with its cloud strategy, which has helped boost the stock value. The MSFT commercial cloud segment is on a run-rate of $6.3 billion, driven by key assets like Office 365, Dynamics CRM and Azure, which is similar to the Amazon.com, Inc. (NASDAQ:AMZN) service. Of these, Office 365 has turned into a big hit with close to 50 million monthly active users.

But the CRM business is also showing promise as revenues are nearly $2 billion. Interestingly enough, Microsoft may ultimately become a major competitive threat to Salesforce.

Given all this, a combination of the two companies would certainly raise antitrust concerns. As seen with some recent mega deals — such as between Comcast Corporation (NASDAQ:CMCSA) and Time Warner Cable Inc (NYSE:TWC) — the federal government has been getting more aggressive. Of course, Microsoft had to deal with a painful antitrust action during the 1990s.

Therefore, Oracle is the most likely suitor. While Oracle has been showing progress with the cloud, it still appears that there is much more to do. Just look at some of the recent earnings reports, which have shown that ORCL has stalled.

Even though Benioff and Oracle’s Larry Ellison often exchange barbs, the two have been able to work together. Keep in mind that CRM is based on the Oracle database. Something else: Benioff worked as an executive at Oracle during the 1990s, and Ellison was actually a seed investor in CRM.

With Ellison no longer as CEO, he may see Benioff as his successor. If so, this could help transform the business and help take on fierce competitors like Workday Inc (NYSE:WDAY).

For investors, all this is still ultimately speculation. Again, the Bloomberg.com article provided few details, and keep in mind that there are often buyout inquiries — which ultimately amount to nothing.

So, while the speculations can be fun and move stocks on a temporary basis, they can be dangerous to chase. This is especially the case when there are only a few possible buyers that can make a deal happen.

As of this writing, Tom Taulli did not hold a position in any of the aforementioned securities.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli

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