- Thomson Reuters
Salesforce famously went on a record shopping spree last year, spending roughly $5 billion on acquisitions.
Add that to its failed bid for Microsoft-LinkedIn’s $26 billion deal, and its surprise interest in buying $12 billion Twitter, and Salesforce truly had one of the most remarkable binge-buying years in history.
But it sounds like Salesforce management is finally planning to put the brakes on its spending this year, according to a note published by UBS’s Brent Thill on Tuesday.
“M&A is still important, though any active, ongoing evaluations are focused on smaller tuck-ins for interesting tech (e.g., AI) or talented teams,” Thill wrote about Salesforce’s thinking after meeting with the company’s leadership team. “Management stated it needs to digest the string of recent M&A, which we agree with.”
Thill noted this is important because Salesforce stock has underperformed in 2016 in large part due to investor concerns around Salesforce going after another “mega-sized” acquisition. That would not only hurt Salesforce’s cash position, but also signal it’s having difficulty finding organic growth from existing products.
Still, Salesforce is likely going to continue to make smaller deals aimed at boosting its artificial intelligence capabilities, as Thill noted. The company’s been making a strong push towards adding more AI features to its core products, and has recently hired hundreds of data scientists. Just last month, Salesforce made another acquisition in this space, when it bought a startup called Twin Prime.
Strong software M&A pace to continue in 2017
Salesforce’s record buying pace last year coincided with one of the most active M&A years in the software space.
As seen in the chart above, made by Evercore’s Kirk Materne, the total enterprise value of the deals in 2016 was significantly higher than any of the previous four years. UBS’s Thill also notes there were 58 deals worth more than $100 million last year, up 45% year-over-year from 2015.
And even if Salesforce, the leading cloud vendor in the software space, is expected to slow down its pace of acquisition this year, don’t expect other companies to stop the trend.
In fact, Evercore’s Materne predicts M&A will continue to be a “key alpha generator” in 2017, with “at least one or two” mega-deals happening. He gives the following five reasons for why 2017 is poised to be another strong year for software M&A:
Big vendors keep buying SaaS: Legacy vendors, like Oracle and SAP, want to move to the cloud, and see buying SaaS cloud companies as a “compelling opportunity” to make that transition faster. There could be more interest in companies laser focused in one area, like AI, machine learning, or digital marketing. Non-traditional buyers continue to acquire software assets: Non-traditional software buyers, like GE and Cisco, will continue to be aggressive in this space. Cisco, for example, made nearly all of its acquisitions in software last year, while half of GE’s deals were software-related. Private equity interest in M&A continues: Private equity firms have been very active, engaging in deals worth billions of dollars in recent years. The thinking is to combine public companies with other private companies in their portfolios. Look for this trend to continue. Google remains a wildcard: Google wants to expand in the enterprise space, but it doesn’t have the same level of “enterprise credibility” as Microsoft or AWS does. Google also has $83 billion in cash on its balance sheet. “We view Google as the biggest potential ‘wildcard’ in the software universe,” Materne writes. Repatriation could catalyze heightened levels of M&A: The combination of a lower corporate tax rate and a repatriation tax holiday, both expected under Trump’s presidency, will potentially help cash-rich software companies to be more flexible with their spending and be more aggressively in M&A.