The Most Confusing Thing About Salesforce’s Acquisition of Blockbuster Slack
After days of speculation, salesforce.com (RCMP -1.49% ) officially announced earlier this week that it was acquiring Soft ( WORK ), the popular enterprise messaging and collaboration platform, for $27.7 billion. That’s more than 75% more than Salesforce’s current biggest acquisition to date: last year’s purchase of Tableau for $15.7 billion. The news overshadowed an otherwise strong earnings release as analysts and investors continue to ponder the implications of the deal and how it could alter the competitive landscape for enterprise software.
Beyond fears that Salesforce could overpay, investors may also be confused about the structure of the deal.
Around 60% cash and 40% equity
Rumors suggested Salesforce would be looking to use half cash and half stock for the purchase. In the end, that was not the case. Salesforce offers $26.79 in cash and 0.0776 Salesforce share for each Slack share. Based on the closing price of Salesforce stock just before the deal was announced, this translated to approximately $18.73 in shares, bringing the total consideration to $45.52 per Slack share. .
In other words, the proportions were close to 60% cash and 40% equities. In contrast, Tableau was an entirely stock transaction.
Salesforce’s use of cash is unique for several reasons. For starters, he just doesn’t have much on hand. The customer relationship management (CRM) technology giant ended the third quarter with $9.5 billion in cash, while the cash component of the offering exceeds $16 billion. To make up the shortfall, Salesforce has secured a $10 billion bridge loan from a consortium of major banks that will run for one year.
Neither company currently has excessive debt, so the combined company’s balance sheet should remain relatively stable.
Additionally, Slack’s $640 million in debt stems from the convertible note offering earlier this year. Salesforce’s proposed acquisition puts Slack shares well above the conversion price associated with this paper ($31). Slack can choose how it wants to repay that debt — in cash or stock — if a bondholder chooses to convert.
Should Salesforce have used more inventory?
How companies structure takeover bids can be telling.
If management is confident that the transaction will succeed and create value, it is better to use the cash to essentially buy out all of the shareholders of the acquisition target. In this way, the acquirer can capture subsequent value creation for itself and its shareholders. When in doubt, it makes sense to use stocks as currency. This decision shares the potential downside risk with the target’s shareholders if the acquisition does not meet expectations or if the synergies do not materialize.
There is, however, another factor to consider. When a company’s inventory is skyrocketing—like Salesforce’s this year—using inventory is attractive. This allows the company to get more for its money, thereby reducing the dilution associated with issuing shares as bargaining chips for an acquisition.
Many variables are at play, but Salesforce might have been better off using more stock than cash in its bid, especially given the sheer size of the blockbuster acquisition. A higher proportion of equity would have minimized the amount of debt the company had to take on, thus reducing its level of overall financial risk. Of course, the confidence signal associated with using cash is encouraging, but using more stocks to share potential declines might have been the right move given the valuation concerns.
“The [valuation] multiple payouts make it difficult to earn a positive return and the history of large mergers and acquisitions at Salesforce leaves us worried there is little near-term upside for stocks as issues of contested organic growth will make likely surface,” Citigroup analyst Walter Pritchard wrote in a research note to investors regarding the proposed deal.
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