Putting Salesforce.com up For Sale? How About a Private Equity Play?

The rumors keep coming, fueled by highly speculative analysis like this latest stab in the dark from Fortune, that Salesforce.com is for sale. I think the question of whether another publically traded company is going to buy Salesforce.com is settled: I agree with Oracle’s Safra, I agree with SAP’s Bill, as well as pundits far and wide: there’s basically no chance that one of the big public software companies will buy Salesforce.com. IBM could use the help, and maybe Mark could give Ginny (aka Ginny Who?, emphasis on the question mark) some tips on how to run up a stock without making big profits doing so, but the disruption that buying SFDC would cause any large company – not to mention the price – would make it a bigger pain in the butt than it would probably be worth.

But how about a private equity buy-out? Maybe even led by Benioff, a la Michael Dell and his eponymous company? How crazy is that?

In my opinion, much less crazy than Google, SAP, Microsoft, Oracle, IBM, or any of the other possible buyers that have been floated since Bloomberg wrote about the rumored sale months ago. It’s possible there’s no buyer, maybe there never was, but if I were Benioff (which, for so many reasons, I’m not) here’s why I would go private equity.

Get out while the going’s good, part 1. SFDC is selling at a nice price today, after another round of rumors have kept the stock up in the face of a weak report from IBM. But the closing price after the last earnings call wasn’t as high as the closing price after the Bloomberg article broke. Smart money likes M&A better than more of the same — good sales volumes, continued overspending on marketing and people, and no profits – or so it appears.

Get out while the going’s good, part 2. The forward price/earnings ratio has always been mind-boggling, and competitive pressures have never weighed more heavily on SFDC as they do today. Here’s the problem: the enterprise software world is in the process of a massive platform shift, and SFDC’s platform, Force.com, is fighting headwinds from some very powerful players. This is a vastly different world than the early days of SaaS CRM, when SFDC held both the first to market advantage as well as the first to no profits advantage, quickly understanding that the markets would tolerate an absence of profitability in the quest for market share. There’s no model for repeating the no profits side of SFDC’s success in the platform business – the sales cycles are too long and complicated – and the time for first mover advantage in the platform business is long over.

Get out while the going’s good, part 3. Right now the likes of Microsoft and SAP are in a quandary induced by the bipolar public markets in which they live. The bipolar mandate is this: grow like a cloud company, make profits like an on-premise company. This creates no shortage of quarterly insanity in both of these companies – like werewolves under a full moon, the execs in these on-prem companies transitioning to the cloud are driven mad by the need to meet these contradictory requirements every three months (Seriously, I’ve heard reports of actual howling as the quarter closes).

Just look at SAP’s latest quarter – actually pretty damn good, considering how hard it is to transition customers, partners, and field sales to a new cloud paradigm. And even in the face of good, solid numbers, and real profits, the street decided to beat up on SAP in the trading following the release of SAP’s numbers. Microsoft will report today, after I post this, and I expect to see more of the same: great numbers for a company successfully managing its transition to the cloud, no appreciation from the Street.

Get out while the going’s good, part 4. Workday finally got its comeuppance for continued losses in the face of okay, but not great, revenues. The end of the Street’s forbearance kicked the stock down 13 percent in the last quarter, and with that drop the blush may be off the rose. Sure, the company is on track to be a $1 billion company, which is without a doubt a helluva achievement. But its lackluster success in financials (a sector it’s trying to crack without much success: SAP has sold more of its new HANA-based Simple Finance in a matter of months than Workday has sold over five years) and lack of a strategically credible cloud platform strategy has made it clear Workday has a lot of work to do moving forward. It’s true that the Street still loves SFDC, but it also loved Workday too. Love is fleeting when money is on the table and fickle financial analysts are in control.
SFDC will soon have to face its own bipolar hell, in reverse: it’s going to have start showing profits in the cloud, while making a play for a bigger presence in the on-premise world. The trend towards hybrid cloud/on-premise deployments is undeniable, and will be huge, bigger than standalone SaaS, in my opinion. SFDC is going to have to create a credible hybrid play that captures more of the on-premise side of hybrid, and in doing so it’s going to have to come down from the cloud to do it.

In my opinion, PE is the best way to survive this disruption: Ask Charles Phillips over at Infor. As I wrote here, he’s sitting on 70,000 customers, only a handful of which have transitioned to Infor’s new tech stack and product line. But with a 90 percent renewal rate, and as a private equity company, there’s no bipolar market to deal with, no quarterly earnings madness driving the execs to howl at the moon.
There’s a lot of reasons why Infor has one of the more sane and well-grounded management teams in the business, and Charles is a big part of that, but the ability to focus on the big prize, and not the quarterly market’s cadence, is also a factor as well. This ability to take the long view is also much more customer-friendly than trying to keep up with the financial analysts’ view that only shareholder value is what counts. I’d like to think we live in a corner of the market where customer sat really matters – unlike sectors like banking, and telecoms, where the quest for shareholder value has put many of these companies into the perennial “least loved, most hated” category among their customers.

In the end, Benioff might be doing himself and SFDC a favor by going private equity. He’d have to give up his lavish, overstocked bench full of highly talented people, his over the top marketing costs, and obviously some control over the company’s destiny as the private equity guys show up, pop on the green eye shades, and start cutting the fat out of a bloated company. But he’ll be giving up less by going willingly than by waiting until he gets Workdayed by the Street and starts seeing the blood on the wall. If you haven’t read Michael Dell’s letter to the WSJ about the PE deal, you should. It’s instructive about when it’s time to be public and when it’s better not to be.

Michael did it, and hasn’t looked back. Et tu, Marc?

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