According to Robert Cyran of the New York Times, buying Salesforce could make Microsoft business customers less likely to stop using Office, but it would come at a steep price. $60 billion is a huge amount of money, and is more than the combined cost of all of Microsoft’s previous deals. It would take a great courage, or perhaps stupidity, from Microsoft CEO Satya Nadella, to make a deal which would create earnings dilution and could provoke the ire of company shareholders.
Nadella to make a big bet on cloud computing?
Nadella and cloud computing are inextricably linked, and he forged his reputation when he oversaw the successful expansion of that side of Microsoft’s business. Since he became CEO last year, Nadella has gone to great lengths to emphasize cloud computing’s importance to the company’s future.
There is a growing movement towards running web-based software, which is faster, easier and sometimes less expensive to run than traditional, installed versions. Those looking for statistics to back up the claim need only look at Microsoft’s online Office suite, Azure platform and other applications for business clients, which are selling around $6 billion per year and have recorded a growth rate of over 100%.
Cyran claims that in contrast to its flagging fortunes with retail customers, Microsoft is performing well in the corporate sector. If Microsoft succeeds in pulling Salesforce software with its existing offer of Office, other online applications and a bundle of free memory, business clients would find it very hard to work with competitors.
However one point of concern is the fact that Salesforce lost $263 million last year, and losses are expected to continue. Microsoft would be spending a huge chunk of money to buy an unprofitable business.
Should Microsoft issue all stock in order to make the deal happen, earnings per share would take a hit of around 13%, including accumulated equity grants which Salesforce issued to employees. Financing the deal using debt would still knock EPS back by around 8%.
Such a development would not be popular with those big funds that like owning Microsoft because the company is willing and able to return capital. Those investors who backed the company to grow following the departure of Steve Ballmer are also likely to be confused by the deal, seeing as buying Salesforce would only increase Microsoft’s top line by around 1 percentage point this year.
Integrating two companies would also add concerns about how to keep both customers and employees.