Should Google Buy Salesforce.com...?
the451group.com
Companies looking to get into new markets typically run the clichéd 'buy, build or partner' calculus on how to get the highest return on the lowest investment. Invariably, the answer is 'yes' to all of the options, as significant strategic moves require broad efforts to take the company in new directions.
Consider the case of Google (Nasdaq: GOOG) and its still-emerging Apps business. (Like so much at the search engine company, there seems to be a 'beta' tag hanging on this division.) It has inked three deals for both technology and a sales channel, unleashed hundreds of engineers on the would-be 'Office killer' and, just recently, put together a distribution deal with Salesforce.com (NYSE: CRM). And yet, Apps still isn't where Google needs it to be. Even more of a concern is that, in our opinion, the moves aren't even enough to get Google Apps in a position to begin to challenge Microsoft (Nasdaq: MSFT) Office. Google needs something more.
Table for two
Let's start with Google's most recent effort: Salesforce for Google Apps. One common theme from the launch of this joint venture last month was the idea that 'the enemy of my enemy is my friend.' Naturally, the two companies did nothing to disabuse people of that simplistic notion. There was talk of years of corporate and personal bonhomie between CEOs Eric Schmidt and Marc Benioff; there was pablum – in stereo, no less – about a 'shared' corporate vision. Even at the launch luncheon itself, there were paired plates to reinforce the idea that Salesforce.com and Google are twin companies. (Too cute by half, we thought between bites.)
All of that is, of course, nonsense. It's an idealized view that glosses over an inescapable fact that it's not a partnership – at least not a balanced one. In this particular endeavor, Google needs Salesforce.com a whole lot more than Salesforce.com needs Google. In our view, Google Apps only wins if Microsoft loses, which is far from the case for Salesforce.com.
Why do we say that? Well, we're trying to remember the last time we heard about Salesforce.com losing a CRM sale to Microsoft Dynamics. The guys in Redmond, Washington, can't even figure out what to call their on-demand CRM offering; meanwhile, Salesforce.com is humming along at $1bn in annual revenue. We would note, however, that Microsoft continues to plug away at CRM, even though it's nowhere near the business that the company once imagined. Microsoft is pitching its Dynamics CRM as a blended online/on-premise offering, something Salesforce.com can't do. It's also slashed the price on its CRM product. And in a competitive poke at Salesforce.com, which sells a fair number of additional modules on its base-level subscription, Microsoft has promised 'no hidden extras' in pricing.
A matter of leverage
None of this is lost on Benioff, of course. In keeping with his fiduciary duties, he will continue to run Salesforce.com for the benefit of the shareholders of Salesforce.com, not an outside party. (He may be friendly with Eric Schmidt and the rest of the Googlers when they break bread together, but business is business.)
Similarly, we can only assume the sales force at Salesforce.com – the company's single most-valuable asset, and the one Google most desperately needs – will continue to act in economic self-interest. They get paid for selling Salesforce.com software, regardless of what software it's hooked into. A sales agent on the cusp of pocketing a handsome commission by selling hundreds of seats of Salesforce.com's SFA module has virtually no incentive to push an unrelated product.
Channel conflict
As it stands, the agreement seems to envision the unlikely scenario that Google just tosses its Apps into the massive Salesforce.com channel and the product, magically, moves itself. Google should know firsthand that's not how it works. After all, in a somewhat similar move to its partnership with Salesforce.com, Google added Sun's (Nasdaq: JAVA) StarOffice last August to its Google Pack, a downloadable collection of applications. That accord hasn't put much of a dent in Microsoft's low-end Works collection, and we suspect the Google-Salesforce.com partnership will not have any more of a ding on Office.
In the end, a successful partnership isn't simply about access. It's about efficacy. In order for Google to control the Salesforce.com distribution channel, it has to control Salesforce.com.
Of course, the benefits of a Google-Salesforce.com combination would extend far beyond the apps business. Consider Salesforce.com's AppExchange business, particularly its AppStore. To date, we would characterize that platform, which was envisioned as a vibrant marketplace for third-party applications, as overhyped. Salesforce.com took the covers off AppStore in December 2006, and said it would be fully developed within a year. However, AppStore is still not there. Despite having more than 40,000 customer installations of applications from its AppExchange, Salesforce.com hasn't figured out how to monetize that. Obviously, having Google Checkout would provide the billing infrastructure that could help make buying an application on AppExchange as easy as buying a song on iTunes. That would play well on Wall Street, which hasn't modeled much revenue from AppExchange.
A steep bill
So, what would it cost Google to pick up Salesforce.com? Well, it wouldn't be cheap, as shares of the on-demand vendor are currently changing hands right around an all-time high. Over the past year, Salesforce.com stock has tacked on 50% while the Nasdaq has basically flat-lined. Meanwhile, Google shares have returned 23%, with most of the gains coming from last month's 'relief rally' when the company reported that the first-quarter ad search business was pretty healthy and that the current economic recession wasn't slowing it down.
Currently, Salesforce.com trades at about an $8.5bn market capitalization. Slapping a 23% premium on the already pricey Salesforce.com would put the bill at about $10.5bn. Although that seems rich, we would note that it's only $1.5bn more than the amount Oracle (Nasdaq: ORCL) was rumored to be considering paying for Salesforce.com last year. More to the point, though, is the fact that Google could easily pull off the deal. In fact, it could pay the bill from the cash and equivalents it has on hand and still have some coins left over. And it generates more than a half-billion dollars of free cash flow each quarter, despite putting a fair amount of money toward datacenters and other capital expenditures.
Or, Google could try to pull off an all-equity deal. While unlikely it would attempt such a large deal that would dilute the holdings of existing shareholders, Google has an exceptionally unconventional relationship with Wall Street. That relationship goes all the way back to its Dutch auction IPO and the dual classes of equities, and continues through its practice of not giving earnings guidance. At current prices, Google would have to issue some 18.5 million shares, on an existing base of 317 million Class A and 77 million Class B shares, to cover the estimated $10.5bn price of Salesforce.com. We highly doubt Google would use its own equity, if just because the practice of buying companies at the top of their valuation with overinflated stock as currency fell out of favor when the air came out of the bubble.
Searching for an answer
Google isn't alone in looking to siphon off some of the flood of cash that Microsoft gets from selling Office. (Operating margins for the productivity suite still run at an astoundingly rich 75%.) But few have managed to take away many of the half-billion users of Office. We don't see Google's current venture with Salesforce.com having much success, at least not in the current arrangement. Again, it needs to own Salesforce.com in order to control the sales force.
Granted, buying Benioff & Co would be expensive right now for Google. But if the search engine wants to be an enterprise player, it needs to buy big. (How could Google have thought that a sub-$100m-revenue startup like Postini was going to be a credible platform to sell into enterprises?) And in acquiring Salesforce.com, Google would finally have a true platform, one that could help it go after not just Microsoft Office but also content management, business intelligence and other offerings. To get that, Google can't use a JV, it needs to use M&A. |
