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Salesforce's decision to acquire Slack in a transaction value of 27.7 billion USD has focused on Microsoft's fierce rivalry. (1), a business software playmaker, is buying Slack, a workplace messaging app (2), for 27.7 billion USD. The deal aims to give the two companies a better shot at the rivalry against Microsoft.

On Tuesday, Salesforce had announced its largest acquisition so far in its 21-year history (3). The San Francisco-based company is one of the first to start selling software as a subscription service. It could be used on any devices connected with the internet, a cut above the cumbersome process of installing programs on specific computers.

Marc Benioff (4), the Founder and CEO of Salesforce, hailed the cloud computing concept as the future wave for much disdain originally. However, the software as a service has now become an industry standard and has transformed itself into a gold mine for firmly established software makers.

The long time industry powerhouse, Microsoft for one, has developed Office 365, a thriving online service suite that includes Team chatting services consisting of many of the same features as the 6-year old application of Slack.

In July, Slack had filed a complaint against Microsoft in the European Union. It sued the tech giant of illegally sacking Teams into Office 365 in a way that bars its removal by users who may prefer Slack (5).

Simultaneously, Microsoft is also posing a threat to Salesforce’s commanding products, a line-up of tools that support other organizations in managing their customer relationships.

A Major Coup for Salesforce

According to Dan Ives, a Wedbush Securities analyst (6), commenting on the deal stated that it is all about Microsoft for Benioff. Microsoft is moving further from Salesforce concerning the cloud wars.

“The core reason for this deal, in our opinion, is to keep pace with the cloud behemoth in Redmond. Slack, despite facing stiff competition from Microsoft, has been a successful solution set further penetrating enterprises and thus looks like the natural fit for Salesforce to beef up its collaboration and messaging footprint and keep pace with Microsoft.”

– Dan Ives (7).

Benioff had left no doubt that he considered the deal a significant stroke after losing to Microsoft in 2016 when both companies were striving to purchase the professional networking platform, LinkedIn (8).

“It’s a match made in heaven. We see in Slack a once in a generation firm and platform. It is a central nervous system for numerous companies.”

– Marc Benioff.

Salesforce is building its success in recent years to diversify into other sectors via a series of acquisitions. It includes its previous largest deal last year when it purchased a data analytics specialist, Tableau Software, for 15.7 billion USD.

Salesforce financed most of the deals with its stock worth more than seven times a decade ago to lift its current market value to 220 billion USD. It is also using its stock to pay half of the Slack purchase and cover the rest with some cash and borrowed money.

The Exit Strategy

On the other hand, Slack has not proven itself popular with investors even though its service, launched publicly in 2014, is popular among government agencies and companies looking for email alternatives.

Slack’s stock was still fluttering around its initial listing price of 26 USD when it first went public almost 18 months ago.

According to an analyst at Forrester Research, Kate Legget (9), It is a stellar exit strategy for Slack as Microsoft Teams eats its lunch.

Stewart Butterfield, the co-founder of Slack, is likely to hope that this sale would work better than when his other company Flickr, a photo-sharing service, was sold to Yahoo 15 years ago. It got lost in the shuffle at Yahoo during the turmoil before it was finally sold again in 2018 to SmugMug.

After leaving Flicker, Butterfield had decided to focus on gaming with a startup company Tine Speck launched in 2009. After a few years, he shifted to the instant messaging service Slack, an acronym for ‘Searchable Log of All Conversation and Knowledge.’

Legget foretold that Salesforce would benefit from Slack because it would add a popular collaboration tool to its software suite, focused on managing customer relationships for government agencies and businesses. She said that customer-relations agents and other Salesforce users’ requirement to cluster around a topic and remote collaborations have grown with the on-going coronavirus pandemic. It has sent many office workers home and has them hooked on new digital tools.

Salesforce hopes to take control of Slack anytime from May to July next year if everything goes smoothly.

Prompted By Pandemic

Slack is free for people who wish to use the basic version had found an apparent adoption in the tech sector for its ease of use and fostering of a more casual conversation than email. The firm had stopped released its daily user count after it reaches 12 million last year. It then started focusing on paid customers.

According to Butterfield, the company had observed a tremendous interest in outpouring because of how the pandemic has forced employees to work from home.

“The pandemic’s played a massive role in paving the way for the deal. The Zooms, the Slacks, the Microsoft Teams will be a new part of the workforce.”

– Dan Ives.

Nevertheless, Salesforce has capped the computing work-from-home boom with an announcement that it is acquiring Slack. And set up a battle with Microsoft for a box seat in one of the tech market’s hottest positions.

Notably, their cash and stock deal is the largest in the considerable cloud software segment, beating Microsoft’s purchase of LinkedIn at 26.2 billion USD four years ago.

The Premium Price

Slack investors would receive 26.79 USD in cash and 0.0776 shares of Salesforce for each of their stock, according to the company announcement. It indicates a 55% premium to the Slack shares’ value before the emergence of their talk news.

The combination would bring Slack’s chat service, which has reached over 12 million daily users pas year, together with a wide range of sales, marketing, and other business software of Salesforce.

The union would offer a more lenient way for workers to tap into Salesforce’s software. It would also make the firm a stronger rival to Microsoft, according to Alex Zukin, an analyst at RBC Capital Markets. He added that ultimately it is about Microsoft since they have it all (10).

While commenting on the development, Brent Taylor, Salesforce President and CEO (11), stated that the pandemic had forced workers and consumers to rely more on digital services, which prompted the company to increase its efforts to build a more comprehensive platform.

“We see the world has fundamentally shifted this year, and we think that the new way of working is permanent.”

– Brent Taylor, President, and CEO of Salesforce.

The deal also brings light to the increasing consolidation in the cloud software sector, which revolves around digital services, paid via regular subscriptions instead of selling software for customers to install on their computers.

Microsoft and Salesforce have sealed six of the nine largest cloud software acquisitions. It has put both companies in the lead as access to digital services has become a common way for companies to purchase technology.

Interestingly, SAP and Oracle have also turned to cloud dealmaking to hasten their traditional software business transformation to keep with the new buying habits.

Over the last two years, Salesforce has earned a reputation for paying enormous premiums for acquisitions. It has also added to Wall Street’s wariness and wiped 28 billion USD from its value since the emergence of Slack talks news.

According to the market experts, the high premium Salesforce was justified as Slack’s value to its customers had dramatically surged this year due to the pandemic. The market is unusual in 2020, and it has forced the company to reevaluate as it tries to upgrade product development.

Notably, software analysts had welcomed the strategic rationale for the deal. It has given Benioff a new weapon against Microsoft while also opening up the path to sell Slack’s service via a much larger sales team.

According to Neeraj Agrawal, a Battery Ventures partner (12), the purchase price has set a new high market for rapidly growing cloud software firms and emphasize their scarcity value when large parts of the economy are grappling.

Slack had appeared vulnerable after reporting disappointing results for two quarters and mission out on 2020’s cloud software boom. Other sector organizations have observed a share price surge as customers were forced to invest in digital services to keep their operations and maintain their workforce connected during the pandemic heavily.

Stewart Butterfield, Co-founder, and CEO of Slack, stand to be one of the biggest benefactors of the sale with a stock valued at 1.9 billion USD. Other larger slack investors include a venture capital group, Accel with a stake worth 2.9 billion USD, and SoftBank with 1.7 billion USD.

The Market Shift

With the deal between Salesforce and Slack, CIOs and other tech leaders are now also looking towards a future where many more workforces are allowed to work remotely for all or part of every week than in the pre-pandemic era. According to a report from research firm Forrester estimates that while less than a tenth of firms would allow all employees to choose if they wish to work remotely once the pandemic is over, 60% would stick with a hybrid model, a mix of office-based and remote work.

One of the top priorities is to ‘reduce the software tool fatigue’, as described by Sathish Muthukrishnan, Ally Financial’s chief information, data, and digital officer (13). He has referred to the frustration and stress employees experience when they are forced to launch several software applications to complete their job and toggle frequently between them.

The issue was already a concern before COVID-19. Still, the shift to remote mass work and the flood of new software apps to support the move has driven it to a higher agenda when pandemic has generally increased stress level amongst employees.

Hence there is a growing demand from tech leaders for everything from data analytics capabilities to collaboration tools and project management software to work effortlessly in collusion.

“In a pre-pandemic world, this level of integration was not as critical as it is now when the ability to interact is essential for the productivity of a distributed workforce,” said Nicola Morini Bianzino, global chief technology officer of professional services giant EY (14).

Tool fatigue has significant implications for security and productivity. The more complex the web of independent apps that IT teams have to knit together, the more substantial risk security holes would be missed. Experts also believe that people working from home tend not to be mentally attuned to security threats as they are in the offices. More tightly integrated software platforms should be easier to secure.

The Future of Work

Slack’s bid seems like a smart strategic move since companies are shifting tech priorities for supporting hybrid work even though Marc Benioff, CEO of Salesforce, had previously tried to cool down expectations around deal activities (15).

“Together, Salesforce and Slack will shape the future of enterprise software and transform the way everyone works in the all-digital, work-from-anywhere world.”

– Marc Benioff, CEO of Salesforce (16)

Notably, Salesforce has progressively extended into other spaces like marketing, customer success, and data analytics, apart from being a cloud-based applications provider.

The integration with Slack will add communication collaboration capabilities to its platform, making Salesforce even more attractive to firms concerned about software tool fatigue and other issues.

The CEO of enterprise cloud company Box, Aaron Levie (17), while commenting on the deal in a blog post, stated that Slack’s combination would give Salesforce a new front-end for the future of work that connects the front office back office, and customers together in a single platform.

While the description would resonate with corporate tech leaders, the deal also raises the pressure on smaller independent software firms like Box, Asana, and Dropbox to expand via acquisitions to meet firms’ raising expectations for fatigue-free and secure software platforms that can effectively support hybrid office and remote work models.

An Aggressive Push

The San Francisco cloud giant marked an aggressive push into the workplace collaboration space, a sector dominated by Microsoft.

Salesforce is going head-to-head with Microsoft’s enormous collaboration business, which generated more than 25 billion USD in commercial customers’ returns in the last year.

By entering the segment, Salesforce may be implied to continue executing acquisitions in the collaboration sector to complement Slack, such as document management firms like Box or Dropbox, and video conferencing firms like RingCentral.

Slack, launched in 2013, primarily received credits for ushering a whole new workplace collaboration with its instant messaging app. It was an instant hit with enterprise customers and has grown to over 15 million users (18).

However, in 2016, Microsoft introduced its Teams platform and integrated it with Office 365. They made the product available to over 115 million users.

The competition then became bitter, which lead to Slack filing a lawsuit against Microsoft in the EU, accusing it of antitrust practices.

In 2020, investors and analysts were lukewarm on Slack as it failed to meet revenue expectations. Before the acquisition talks, Slack was viewed as that it would remain in a distant second place to Microsoft, and it is not a good place to be, says Mark Moerdler, an analyst at Bernstein (19).

Both Microsoft and Slack have loyalty among various users. Microsoft is a favorite among CIOs who says that executives prefer Team’s price points and the integration with Office products, says Brad Zelnick, an analyst at Credit Suisse (20). He also added that but when you speak to technical people, digital natives, and end-users, they often prefer Slack over Teams.

What’s Next?

Several software firms are in high tide with surging stock prices, easy access to more capital, and sitting on large cash piles. In addition to Salesforce, potential buyers in the market, according to bankers (21) include Adobe; which acquired Workfront earlier this month, Twilio; who recently scored Segment, and Sendgrid and ServiceNow. Their potential target includes Asana, Box, Dropbox, Airtable, and Smartsheet. There are no doubts that these deals won’t be easy on the pocketbook, but as buyers’ shares rise with targets, they may be more stock-for-stock deals.

While all the buzz is happening over Salesforce’s enormous deal to acquire Slack, Microsoft is still the elephant in the virtual room. The giant’s office software is already installed on most workplace computers, making it easier to integrate its collaboration tool.

Notably, Microsoft has been acquisitive throughout the COVID-19 pandemic and is trying to score TikTok. It had also recently announced a deal to purchase the gaming firm, Zenima Media (22).

Even though Microsoft may face more regulatory scrutiny than its rivals, it can certainly have the wherewithal for plenty more acquisition. It is sitting on about 136 billion USD in cash, and it is one of the few organizations with a AAA credit rating.

Nevertheless, buying Slack has become the second big-ticket Salesforce has acquired in the last 18 months after buying Tableau at 15 billion UD in August the previous year.

Interestingly, Slack and Salesforce are headquartered about a block away from each other in San Francisco. Slack’s office is in the shadow of Salesforce Tower with 62 stories, the tallest building in Northern California.

Benioff had stated that

“I get to look right out my window, and you know what I see? Slack.”