Salesforce.com, Inc. (NYSE:CRM) stock was hammered overnight as investors complained it was overpaying for its latest acquisition.
The target is Mulesoft Inc (NASDAQ:MULE). MULE was under $24 per share on February 9, but is now trading above $44. The integration-software company has accepted an offer from Salesforce of $6.5 billion, including debt.
One complaint about the deal said that Salesforce is getting a mule for the price of a pedigreed horse. Salesforce stock was down more than 2% after dipping as low as 5% in overnight trading.
The Mulesoft deal is a great example of why you don’t let Wall Street into software deals, why you leave them to the technologists. Salesforce paid full price for this acquisition, but it’s not nearly as bad a deal as the market believes it to be.
What Salesforce Is Buying
Mulesoft went public only a year ago and had nearly tripled its revenue between 2015 and 2017, from $110 million to $296.5 million. It wasn’t yet making money, but it had achieved positive operating cash flow by late 2017. There was $200 million in cash and short-term investments on the balance sheet. Debt was minuscule, but starting to pile up.
On the surface, that means CRM is paying about 22 times sales for the company, which is high. But what Salesforce is getting, in terms of software, matters more than the price relative to sales.
With this purchase, Salesforce is getting a hybrid cloud play.
Mulesoft gets Salesforce into companies that are deploying cloud-like software on their premises, to protect their crown jewels. This is where “legacy” players were making their own cloud plays — companies like IBM (NYSE:IBM) and Oracle Corporation (NASDAQ:ORCL). They were starting to gain traction.
Technologists call Mulesoft an “API farmer,” in that it lets engineers connect application program interfaces to one another, dragging legacy applications and their data into the cloud. (Hence the name.) The result, for Salesforce, will be a “Salesforce Integration Cloud” after the deal closes in July.
Salesforce and Mulesoft were already partnering in this area, but Salesforce decided it could scale the effort faster by buying the company. The high price it paid guarantees the Mulesoft team stays together.
That’s the key. Mulesoft is far from a finished product. So it needs to keep its team together. But it can grow faster if it has a jet engine of cash behind it rather than worrying about the next quarterly report.
The Risks for Salesforce and Salesforce Stock
Early in the decade, it was widely expected that the “hybrid cloud,” connecting internal resources to cloud data centers, would develop quickly after big companies began buying cloud.
It didn’t work out that way. Hybrid cloud is lagging the rest of the cloud market. It’s only now that enterprises are trying to connect their old legacy data and they’re starting to understand what cloud can and can’t do for them. (Note: they’re connecting the legacy data, not just building an on-premises cloud machine.)
That’s where Mulesoft enters the picture, and that is also the opportunity for Salesforce. While Salesforce first ran on Amazon.com, Inc. (NASDAQ:AMZN), they have since made deals with Alphabet Inc (NASDAQ:GOOGL) and Microsoft Corporation (NASDAQ:MSFT).
With Mulesoft, Salesforce can help old-line companies navigate these public cloud resources and connect their own internal efforts.
The Bottom Line for Salesforce Stock
In fast-growing markets, companies reach for growth, not profit.
That’s what Salesforce.com is doing here. Keeping Salesforce stock going means maintaining a 20% growth rate even at a $10 billion run rate. Mulesoft will let Salesforce do that for years to come, if it keeps Mulesoft’s key people happy. Overpaying keeps them happy.
This is a good deal.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and MSFT.
