Why the Salesforce.com, Inc. Deal With Mulesoft May Be Too Risky

CRM stock - Why the Salesforce.com, Inc. Deal With Mulesoft May Be Too Risky

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When it comes to acquisitions, salesforce.com, inc. (NASDAQ:CRM) is far from timid. The company’s co-founder and CEO, Marc Benioff, has pulled the trigger on many deals during the past few years. And the results have been mostly positive for the CRM stock price.

Yet the latest deal looks like a head-scratcher. That is, last week the company agreed to a $6.5 billion purchase price for Mulesoft Inc (NYSE:MULE), which involved a combination of cash and CRM stock.

But Wall Street’s reaction has not been warm. Since the deal was announced, CRM stock has dropped from $126 to $113.

One of the main issues is the steep valuation. Keep in mind that Benioff was willing to pay about 22 times sales! Even in the wild world of tech, this is definitely rich. Analysts from Jefferies, RBC Capital and Keybanc Capital Markets all noted that the deal’s multiple was the highest for a public SaaS operator.

Now it’s true that the valuation should not be the only consideration. Let’s face it, there are many examples where deals have looked kind of wacky. Remember the skepticism when Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) shelled out $1.65 billion for YouTube? Or how about when Facebook, Inc. (NASDAQ:FB) paid $19 billion for WhatsApp?

However, in regard to the MULE deal, it seems reasonable that CRM is basing its valuation on the best-case scenario — and then some. And this is an indication that the company realizes it’s going to get tougher to pump out growth.

Benioff has not been shy about his stretch goals for Salesforce.com. By 2022, the sales forecast is for $20 billion, and by 2028, it is $40 billion (the sales for the past year came to $10.5 billion). In other words, he has little choice but to focus on M&A.

Salesforce Stock and MULE

MULE is certainly a great company. Founded in 2006, it was one of the pioneers in developing APIs to help companies better access their legacy technologies, such as through the cloud.

A key part of the strategy has been to rely on open-source software, which has allowed for faster development, more robust features and a thriving ecosystem. As seen with other companies like Splunk Inc (NASDAQ:SPLK) and Red Hat Inc (NYSE:RHT), this model can be powerful.

As for MULE, the company has been growing at a fast pace. Last year, the company’s sales jumped by 58% to $296.5 million. Note that MULE has been able to snag over 1,200 customers, which include biggies like The Coca-Cola Co (NYSE:KO), Barclays PLC (ADR) (NYSE:BCS) and Unilever NV (ADR) (NYSE:UN).

According to Benioff:

“Every digital transformation starts and ends with the customer. Together, Salesforce and MuleSoft will enable customers to connect all of the information throughout their enterprise across all public and private clouds and data sources — radically enhancing innovation.”

Bottom Line on CRM Stock

Besides the valuation, there are other reasons that the MULE deal looks dicey. One is that there is not much synergy with CRM. MULE is primarily an infrastructure provider, while CRM has been mostly about cloud applications for sales, marketing and support.

In other words, there will likely not be much synergy when it comes to leveraging CRM’s massive distribution. This will make it difficult to justify the high multiple on the deal.

Next, there are solid alternatives to MULE, such as Talend SA ADR (NASDAQ:TLND) and various other startups. The fact is that CRM could have entered the market in a much cheaper way.

Granted, CRM has done well with its M&A. For example, after having engaged in an aggressive string of deals in 2016, the company was smart to spend the next year focused on integration.

Yet the MULE deal is unique and massive. If anything, it will be a major test for operations, presenting risks for CRM stock.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2018/03/why-the-salesforce-deal-with-mulesoft-may-be-too-risky/.

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