Can Salesforce Acquisition of Slack Slacken Growth of Teams?

Amid a week of speculation, the Salesforce acquisition of Slack became official late Tuesday with an eye-popping $27.7 billion deal. It will rank among the largest software deals ever, dwarfed only by IBM’s $34 billion acquisition of Red Hat.

Salesforce has made numerous major acquisitions, including last year’s Tableau deal for $15.7. In 2018, Salesforce acquired MuleSoft for $6.5 billion and Demandware for $2.8 billion in 2016. The Salesforce acquisition of Slack for cash and stock will cost more than all of those prior deals combined.

Expect the deal to close next year, presuming shareholder and regulatory approvals. Slack will become an operating unit within Salesforce, which founder and CEO Stewart Butterfield will continue to lead. The Salesforce acquisition of Slack dominated Tuesday’s investor call to discuss the company’s just-released quarterly earnings report.

Marc Benioff, Salesforce’s high-energy CEO, was euphoric about the deal during the call.

Salesforce’s Marc Benioff

“This is the next generation of Customer 360,” Benioff told investors, referring to the company’s connected application platform. “This is our ultimate vision of having this incredible user interface on top of all of the surfaces of all these channels, and all the collaboration running on all these devices, this integration, interaction, and the ecosystem and the industry that has created around it and all the applications.”

Nevertheless, investors did not share Benioff’s enthusiasm, particularly because of the large premium Salesforce agreed to pay for Slack. Salesforce shares closed nearly 9% lower Wednesday. The company is paying nearly 25 times Slack’s 2021 estimated revenue, which analysts predict will fall between $855 million and $870 million. Salesforce may have had to pay the premium if another suitor was in the mix. Indeed, that is likely what pushed up the value of the deal, according to a report by UBS analyst Karl Keirstead.

“We believe that there was another bidder for Slack that potentially caused Salesforce to move faster and potentially to pay more,” he said.

Does Salesforce Need to Own Slack?

Slack wouldn’t be the first enterprise chat communications tool from Salesforce. A decade ago, Salesforce launched Chatter, an enterprise social networking platform designed to enable real-time collaboration and communications. Salesforce launched Chatter with much fanfare as a tool that enabled real-time communications via feeds and status updates. But it never gained the momentum Benioff had envisioned.

Salesforce’s need to acquire Slack puzzled some analysts. As partners, Slack already tightly integrates into the Salesforce platform. Moreover, Benioff earlier this year had strongly eschewed the notion of embarking on a major acquisition, citing the current environment. Asked about that by Morgan Stanley analyst Keith Weiss during the earnings call, Benioff said: “I don’t think I could have ever imagined any acquisitions happening this year.”

But Slack’s Butterfield and Salesforce president and COO Bret Taylor presented the idea to Benioff of how Slack could build on the Salesforce user experience. That convinced Benioff.

“It’s like something that we could have never imagined,” Benioff said. “And when we look at the difference between partnering versus owning, it really means that …

… we’re able to do things with our technology that we just could not do as partners.”

Overtaken by Teams?

Since going public last year, Slack has underperformed other high-profile tech IPOs of late, such as Snowflake and Zoom. Meanwhile, usage of Microsoft Teams has accelerated during this year’s COVID-19 pandemic. A year ago, Microsoft reported 20 million people actively use Teams, and as of October that figure was 115 million. Slack hasn’t reported its number of active daily users since April 2019, when it was at 12 million.

“Slack hasn’t made [as] much noise as it should have during a year when we’ve seen much more remote work and presumably need more collaboration tools (contrast the buzz around Slack vs. the buzz around Zoom),” according to a post by several analysts at Forrester Research. “Microsoft has dominated the space in recent years, due to the large Skype for Business installed base that is now moving to Teams and Microsoft’s success in bundling Teams with M365.”

Nevertheless, Slack’s chat communications tool is popular among large enterprise customers. Slack, which also released earnings for the quarter, said it has added 12,000 new paid customers, up 140% year-over-year. The company on Tuesday said it had 1,080 customers generating more than $100,000 in annual recurring revenue, a 32% year-over-year increase. While Slack continues to expand its customer base, growth from Microsoft Teams has significantly outpaced it. Apparently realizing that its road to growth as a standalone company was limited, Slack started looking at its options.

Nemertes’ Irwin Lazar

Industry analyst Irwin Lazar of Nemertes believes Salesforce could try to compete with Microsoft Teams.

“Salesforce would move to position its own offering as clear enterprise collaboration alternative to Teams, potentially including Slack as a bundled feature with Salesforce licenses,” he said in a post published by NoJitter. “It could strengthen the offering by maintaining the planned integration of Amazon Chime video meetings into Slack, and even add voice capabilities through integration with [Salesforce’s] Lightning Dialer, giving Salesforce a true, integrated, voice, meeting and team collaboration capability. My guess is that this is the bigger picture goal of the acquisition, but time will tell.”