Why Slack Can Sell: Microsoft is raging

In the middle of last year, when Slack went public on Wall Street, the cloud software company Salesforce ran a slide show over the company to see if it should try to get it.

His opinion at the time, according to a knowledgeable person: Slack, a pioneer in a new form of workplace communication and collaboration software, faced business challenges that made his shares seem overpriced. If Salesforce was patient, there was probably a better moment to buy.

Maybe the time has finally come. Salesforce is now negotiating to buy Slack and is putting together a demo with Microsoft that could define how many office workers around the world use the software.

For Marc Benioff, CEO of Salesforce, the wait seems worth it. Shares of his company jumped 57 percent in the 17 months since Slack went public, allowing a 5 percent drop on Wednesday in news of the talks. This left him with a much stronger currency for a deal that is likely to be largely paid for in stock.

In contrast, Slack shares fell nearly a quarter over the same period before jumping due to news of a potential deal.

While Slack’s fortune came out in a year when other cloud software stocks were hot commodities on Wall Street, its potential strategic value to Salesforce doesn’t seem to be declining.

Created as a new form of channel-based chat service, Slack has evolved into a broader workplace tool. As more and more of a typical company’s business is conducted through software, the Slack service has become the starting point for a growing range of activities, and this has provided a window to cut into other applications such as starting a video conference or tracking accounts.

In light of the central position in the lives of many employees, Slack says users spend more than 10 hours a day on average on the service and are actively using it for more than 100 minutes.

However, Slack lost time because of a similar feature called Microsoft Teams, in part because Microsoft decided to include the feature as a free add-on to the widely used Office software suite. As the coronavirus epidemic forced workers to use new types of software to communicate, the number of daily users of Teams recently reached 115 million, up from 20 million a year ago.

Slack, a more sophisticated software with less immediate value than a pure communication tool for employees to stay in touch, has grown much more slowly. It does not disclose user numbers, but it now estimates that 130,000 organizations are paying for its service, a 30 percent increase over the past year.

Slack also lost customers as smaller companies in particular struggled this year. Stewart Butterfield, CEO, argued that contracts with new customers in recent months have put the company in a good position in the long run, but the delay in recognizing revenue from such cloud transactions means it will experience a significant revenue slowdown earlier then.

For Mr. Benioff, an acquisition would uncover a series of transactions aimed at expanding his company’s stake in the day-to-day work life, thereby conflicting with Microsoft.

In 2018, Salesforce paid $ 6.5 billion for a cloud-based and data integration tool, MuleSoft, and the following year, Tableau paid an additional $ 15.7 billion for a data visualization service. But he lost the LinkedIn bidding war for Microsoft, and Mr. Benioff later sought to buy Twitter with Wall Street patience. Three months ago, he did everything he could to reassure investors, saying software appraisals had reached such a high level that Salesforce was unlikely to become an acquirer.

Slack’s underperformance may be an exception, but Wall Street remains concerned. Concerned that the deal would dilute Salesforce’s earnings per share, it could wipe $ 12 billion off Wednesday’s market value. But even the 40 percent premium – roughly as much as Salesforce paid for the last two major acquisitions – would be justified if it produced the kind of raise Salesforce received from its MuleSoft deal, according to Derrick Wood, an analyst at Cowen.

The success of the troops increased Mr Benioff’s urgency. Microsoft’s service has become a powerful tool for directing users to other applications in the company – including customer relationship management software that competes directly with Salesforce’s core business.

Microsoft has managed to integrate teams more closely with its broader cloud-based computing platform, tying employees more closely to other software. That was one of the reasons Slack filed an antitrust complaint to the EU earlier this year, claiming that Microsoft had unfairly squeezed it.

In contrast, Salesforce might have thought of using Slack as the “interface” for a more open set of cloud software tools, one man thought. It would connect to services like Salesforce’s own CRM while continuing to integrate widely used applications from other companies.

Mr. Benioff has already had some success in bringing such companies into the growing Salesforce software portfolio, along with the entrepreneurs behind them. Bret Taylor, one of the founders of Google Maps, joined Salesforce after acquiring his own cloud-based collaboration company, Quip, and became CEO of the product. The former CEOs of Tableau and MuleSoft are also still with the company.

The key question now is whether Mr Butterfield is ready to give up his dream of building an independent rival for Microsoft and throwing his share at Mr Benioff.

Thanks to a special class of voting shares, Mr. Butterfield’s personal stake in Slack, currently estimated at $ 1.6 billion, gives him nearly 22 percent of the votes and controls an additional 20 percent of the votes through agreements with other shareholders. . Accel, an early-stage venture capitalist, has an additional 26 percent of the vote, increasing ownership concentration.

Mr. Butterfield’s last experience in selling the company he founded did not end well. Flickr, a photo-sharing site acquired by Yahoo in 2005, has become the motto of Silicon Valley as to why entrepreneurs should resist the sale. Yahoo was unable to take advantage of the pioneering service, and Butterfield described his time on the web portal as the low point of his work.

As Microsoft rages and its latest company loses momentum, an attachment to Salesforce may be one of the best ways for Slack to remain a remnant of working life.