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.
At the end of the first quarter, ExactTarget had $378 million in total assets. It means that the hefty portion of the transaction would end on the goodwill part of Salesforce.com’s balance sheet. Goodwill already accounted for 24% of Salesforce.com total assets. Goodwill is tested for impairment every year. When the goodwill is impaired, a company makes a write-off of assets on the balance sheet, which is very bad for the stock. Typically, the more goodwill a company has on its asset list, the riskier the investment.
salesforce.com, inc. (NYSE:CRM) states that ExactTarget Inc (NYSE:ET) would contribute approximately $120 million to $125 million in revenue for the remainder of the fiscal year. Salesforce.com is projected to achieve almost $4 billion in revenue this year, so the purchase would contribute approximately 3% of the revenue.
Bottom Line
ExactTarget shareholders must be happy. They’ve just gotten a hefty premium for the company that was losing money and was projected to lose money in the next two years. Oracle Corporation (NASDAQ:ORCL)’s, Microsoft’s and SAP’s shareholders can sleep well. Nothing disruptive happened.
Their competitor has spent a lot of money on an asset that has yet to prove its worthiness. It’s only Salesforce.com shareholders that might be unnerved. The transaction must give a great boost to salesforce.com, inc. (NYSE:CRM) revenue to justify the price. With Saleforce.com’s market capitalization of more than $22 billion, no one would be buying it for growth prospects. The company must improve its profitability to deliver value to shareholders.
I repeat my stance: Salesforce.com is overvalued.
The article Salesforce.com Makes a Doubtful Purchase originally appeared on Fool.com and is written by Vladimir Zernov.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Salesforce.com. The Motley Fool owns shares of Microsoft and Oracle. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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