salesforce.com, inc. (CRM) Makes a Doubtful Purchase

Not long ago I wrote salesforce.com, inc. (NYSE:CRM) is overvalued.

salesforce.com, inc. (NYSE:CRM) has now told the world it is acquiring marketing firm ExactTarget Inc (NYSE:ET) for $33.75 per share in cash. The total transaction value would be approximately $2.5 billion. This represents a 53% premium to the price at which ExactTarget Inc (NYSE:ET) traded the day before the announcement.

The race

According to Gartner, Salesforce.com is the leading customer relationship management, or CRM, system in the world — hence its ticker symbol. Besides its main platform, salesforce.com, inc. (NYSE:CRM) offers Sales Cloud, Service Cloud and Marketing Cloud. It is the Marketing Cloud that Salesforce.com thought needed to be strengthened. This is the rationale behind the purchase.

In late 2012, Oracle Corporation (NASDAQ:ORCL) purchased cloud marketing software provider Eloqua for $871 million. Oracle is one of the main players in the field and has been paying its way into the market with purchases, as it got into CRM by buying PeopleSoft and Siebel.

Other big players in the market, such as Microsoft Corporation (NASDAQ:MSFT) and SAP AG (ADR) (NYSE:SAP) are expected to make moves as well. Microsoft is trying to push its Microsoft Corporation (NASDAQ:MSFT) Dynamics to a higher market share. Currently, its product focuses on smaller customers than those of Oracle and SAP AG (ADR) (NYSE:SAP).

SAP AG (ADR) (NYSE:SAP) is always a player to consider. A leading Enterprise Research Planning, or ERP provider, it has a huge customer base, which allows it to cross-sell its solutions.

There is big difference between salesforce.com, inc. (NYSE:CRM) and giants like Oracle, Microsoft Corporation (NASDAQ:MSFT) and SAP. They can afford to acquire new technology without harming their stocks. Salesforce.com, which trades at a forward earnings multiple of 60, does not have this luxury. Microsoft and Oracle Corporation (NASDAQ:ORCL) trade at multiples of 11.43 times forward earnings and 11.70, respectively. SAP is pricier, trading at 19 times forward earnings. The purchase would make sense for Saleforce.com shareholders if it would significantly improve its revenue prospects, but would it?

The future

Salesforce.com finished the first quarter with approximately $3.1 billion in cash and marketable securities. The firm has stated that it plans to finance the transaction with the help of both cash and a term loan. salesforce.com, inc. (NYSE:CRM) is already highly leveraged with a 0.69 debt-to-equity ratio.