Salesforce has scheduled a press conference tomorrow to announce a strategic partnership with a “leading Internet company based in the Bay Area.” CEO Marc Benioff and a “special guest” will make the announcement together.
The smart money is betting that the partner is Google, and that the announcement itself won’t be much to write home about. Most likely it will be tighter integration between the companies. One rumor says that Salesforce customers may get a discount on Adwords if they bid through Salesforce’s software.
More evidence for this: Salesforce sent me an email about this comment on my previous post by “Lorilee Walton,” saying that it “may contain sensitive internal information being posted by an internal employee” and asking for information on their email and IP address (I did not supply it to them).
But whatever the announcement is, assuming the partner is Google, it will send a strong signal to Microsoft: Google and Salesforce are aligning against the Washington giant.
Salesforce: Acquisition Bait
Speculation that Google was actually going to acquire Salesforce was running rampant through the hedge fund circles a few weeks ago. This rumor may have led to the recent increase in Salesforce stock, which trades at an eye-popping 4,000+ P/E ratio (to put this in perspective, Google and Microsoft have P/E ratios of 45 and 22, respectively). The stock increase isn’t due entirely to the rumors, of course. The company continues to report strong sales growth.
And a perfect storm is brewing for Salesforce. They are a leader in their market, and they just happen to fill in a lot of the gaps in Google’s going forward strategy. I present the argument for this below, which is based on interviews with a number of analysts and industry experts.
Also: Salesforce CEO Marc Benioff is known to be somewhat checked out, spending as much time as possible in Hawaii and letting his lieutenants run the day to day operations of the company. If Salesforce sold for $80-85 (it is currently just under $50), Benioff would be able to put another billion or so in his pocket and mark his place in the history books as the guy who popularized the notion of delivering software through the browser. He could spend his days lounging in Hawaii, writing more books, and speaking.
Why It’s A Perfect Fit With Google
Google is quite simply on a collision course with Salesforce. Google CEO Eric Schmidt recently said that Google is all about Search, Software and Ads. They already dominate search. In advertising, the next battle will be over auction exchanges. Google already picked its horse in that race when it acquired DoubleClick for $3.1 billion in April. Yahoo and Microsoft quickly acquired their own startups in this space as well – Yahoo bought RightMedia for $680 million and Microsoft acquired aQuantive for $6 billion.
That leaves software, and until last week it wasn’t clear exactly how Google would be competing with Microsoft’s dominance in the operating system and office space. But then Google introduced Google Gears. Google is now turning its office products into full offline applications. In the near future users will be able to use Gmail and Google Docs & Spreadsheets offline, with full read/write functionality. They’re bypassing the operating system (the browser is the new operating system) and their apps will now offer a real alternative to Outlook and Office. Small and medium sized businesses will no longer have just one real choice when loading (and paying for) software on their PCs.
And when you combine all that stuff with Salesforce’s CRM apps and developer platform, Microsoft has a real problem. The future of software delivery is the browser. Google’s betting on it. Salesforce has already made a business at it. And Microsoft, with Office Live and Silverlight, is placing some bets there too.
But that’s not all. Google has known for years that they need a real sales staff to get distribution of their products. They have always had direct sales reps for Adwords, and they just bought a whole lot more with DoubleClick. Salesforce has a huge telesales team and a smaller direct sales team pushing their products to the enterprise quite effectively. Google doesn’t have the staff, expertise or contacts to sell their stuff into the enterprise.
Google’s office products haven’t made any headway into the enterprise yet. Microsoft Exchange is simply too good and most medium and large businesses rely on it. Without a sales team, Google has no hope to get into the market quickly, even with Google Gears to make their apps work offline. Add Salesforce’s sales team into the mix, though, and you have a whole new playing field. The combined entity will be able to offer fully functional offline applications for email, office, and CRM (I’d expect Google to use Gear to quickly create offline versions of Salesforce CRM and App Exchange). Given the huge cost savings, this combined entity would surely get sales traction quickly.
Microsoft Can’t Let This Happen
As I said above, Microsoft knows that Salesforce’s model is the future – their Office Live and Silverlight products confirm this. They have no particular reason to want Salesforce, but they have a very big reason to keep it out of Google’s hands. A combination of Salesforce’s sales team and CRM software with Google’s Office docs and Google Gears to make the whole suite work offline is a real competitive threat to Microsoft Exchange. If Exchange crumbles, Microsoft could lose its control of the Office space. And since the future of software is delivery through the browser, Vista becomes an afterthought. Google and Salesforce software will run just as well on Macs and linux machines. When the enterprise market sees that they can knock $500 or more off the cost of a computer by going linux and Google/Salesforce, many will walk away from Microsoft completely.
This All Points to a Bidding War
Google wants Salesforce. Google Office fits perfectly with Salesforce CRM and App Exchange. Google can take all of it offline with Gears. And Salesforce can sell it with their existing sales team. And the timing is right – Benniof is signalling that he is ready to retire.
But Microsoft can’t let that deal happen, and is very likely to enter a bidding war to try to keep Google and Salesforce apart. They walked away from the DoubleClick deal, then bought aQuantive for $6 billion just to stay in the game. If they hear that Salesforce is selling, they’ll be right there making a bid. Otherwise, they may just let Google do a complete end-around on their OS and Office businesses. And that could kill them in the long run.
Salesforce has competitors, and Microsoft could always go after them instead if Google buys the company. But NetSuite, the largest, is going public and is controlled by Oracle’s Larry Ellison. He won’t let a sale to Microsoft happen, before or after an IPO. Next in line is RightNow, which is a very distant third in this market.
By the way, there are some interesting personalities pushing all of this behind the scenes. The most important is a guy named Paul Chamberlain at Morgan Stanley. Chamberlain represented TellMe and aQuantis in their sales to Microsoft, so he knows exactly how to pitch them. And since Morgan Stanley took Salesforce public, it would be a natural fit to hire Chamberlain to represent them in a sale. My guess is he’s busy meeting with execs from all three of these companies, pitching a deal. And he may just put it together sometime soon.
Salesforce is indeed a perfect for Google – this Web service will do alot to validate Google as a player in the small to medium business market.
Google’s previous offerings, while nice, just has not motivated home businesses and small offices to go online for their business productivity work.
This acquisition will earn a great deal of credibility for Google in that space, because Salesforce has a loyal following and could be developed further and intergrated into Google’s services.
Well if Salesforce is already asking others to reveal sensitive information on their employees, then they are really going to gel well with Google’s “don’t be evil” ethos…
Why hasn’t anybody made a movie yet on the politics of acquisitions and mergers in Silicon Valley, this kind of stuff is good popcorn material.
Arrington you should write the script, put payperpost in there just to spice things up a notch. We all know how much you love them.
Acquiring Salesforce.com will be an incredible boost to Google’s ability to execute in the SMB/Enterprise space. There could be cultural issues with an integration, but I think Google’s getting to the point where they could have two different organizations selling in two different markets (advertising vs SMB/Enterprise).
Google has a lot of smart people, but they just don’t have the Corporate Sales DNA. Even though SaaS is not like enterprise software sales, it’s still requires a corporate sales model with a dedicated sales force. Salesforce.com has proven that they can execute a low cost sales model with a dedicated sales force. If Google is serious about the SMB/Enterprise, they really need to acquire rather than build a sales machine from scratch.
Any idea what happened to the team and technology behind JotSpot? Because that could provide a developer platform for enterprise instead of needing Salesforce. Though it might be tempting for Google just to go out buying once again.
Suggestions that versions of Salesforce offline could be very soon, are perhaps premature. So are suggestions that the the future OS is the browser. Silverlight (Windows Presentation Foundation) and Apollo show that for richer applications installable client applications are still the future. We’re talking years away.
I still think any web Office like apps need to pass the Mail Merge test to get traction with small business. No Mail Merge, it aint an Office app!
With this strategic alliance Google’s office products are heading into the enterprise arena. But Microsoft way out could be trying to buy SalesForce, entering in a bidding war. The one company left in this area in NetSuit, however this is controlled by Ellison Oracle’s CEO.
What would happen if Oracle tries to make a hostile takeover of SalesForce. Then Oracle will control this business model for CRM that could be extended to their other products when the time comes after maturing in one side the market for online ERP applications and on the other side the Fusion Project ready to rumble.
Meanwhile Microsoft and Google are fighting the winner could be Oracle.
Mario Ruiz
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hmmmm – To be honest / with YTube going for 1.6bln ….
Salesforce would have to be worth 5-6 billion.
– Google won’t pay that / they will lock up partnerships though.
I agree – this is going to be a huge acquisition that even Google will have a hard time to swallow. If they could be benefits are great: even greater integration into sales/marketing departments at a large number of firms.
#6: Totally agree that it’s gotta 5-6B based on Google’s previous deals. They’re training larger companies to expect these massive valuations now, which is a little crazy.
Either way, Salesforce’s market cap is just north of 5B, so the purchase price would need to have a premium on that of at least 50% – so even just 51% of the company would run them nearly 4B.
Michael, I asked Dave Girouard at the end of last year whether Google would buy Salesforce. After he stopped giggling, he said that Google has no interest in going after applications that aren’t logical extensions of “the Google everyone knows and loves in the consumer world.” Sounded like a reasonable statement. I like your division of the market, but it leaves unanswered whether Google is willing to go so far outside its comfort zone.
That much for source protection “I did not supply it to them” – How about just telling that it was an internal employee that provided it to you, AND that you have the individual’s email and ip?
“Lorilee Walton” — the TC commenter you mentioned Salesforce was trying find — linked to Lorilee Walton’s myspace page. Guess what her profile song was? “Shine” by Collective Soul. Dude, that song SUCKS!
i love that Bass riff on Shine!!
)
i’ve always loved ACT! for CRM but Salesforce is certainly more Web oriented* it makes sense for Google to scoop this one but as a coupla peeps mentioned these Valuations are outrageous*
)
Mike, its nice seeing you writing these longer reviews. (even though you don’t make as much $$$ on them.)
Thanks!
Mike, this is an excellent analysis of the situation. I am somewhat knowledgeable on this (don’t work for any of the companies mentioned, so I am not breaking any confidentiality here), but it is true that Marc Benioff is desperately seeking strategic choices. As has been reported by ZDNet bloggers, Salesforce growth is slowing down, and the stock has been levitating of late, particularly after the Google acquisition rumors. If he does nothing (tomorrows announcement is most certainly going to be lame!) the stock will go right back down. And he cares a lot about the stock price, as anyone who knows him can attest.
Benioff has considered acquisitions in the past, but he is in a delicate dance with his stock price, and doesn’t want to be seen to be overpaying. Unlike Google, he just doesn’t have much “room” – a billion wasted is nothing for Google, but Benioff just doesn’t have the luxury, particularly with the P/E it already commands, and the slowing growth. So acquisitions that don’t add to the E reasonably quickly will worsen his P/E, putting pressure on his stock. And Google has that aura of mystery and grandeur about it, which Benioff’s sales guy cheap-shot antics have denied him, so he cannot go on “trust me” too long.
His other strategic problem is his own core business is facing price pressure in the low end. Moving higher to escape creeping commoditization pits him against Oracle/SAP, which he knows is not going to be easy.
So he is going to sell. From his perspective, Google would be the best company to sell to, both from a stock valuation perspective and from a going-with-glory perspective. If the stock goes down, Oracle would surely emerge as a bidder (Ellison has publicly mused about adding Salesforce to his stable). Benioff would do anything to avoid that fate, because in a sense it would represent failure.
His problem is that Google doesn’t really want to pick a fight with Oracle/SAP, at least not anytime soon. Microsoft is their enemy, and they don’t want to make new enemies. So they would probably pass on Salesforce. And the cultural fit just isn’t there at all for Google.
Benioff knows Google is at best lukewarm about him. That is why he is playing coy, letting the impression of Google-being-a-suitor gain ground (which only helps his stock), and hoping that someone else will make a bid, preferably on top of that already boosted stock price. Delicate high-wire act, if you ask me.
Salesforce had an offline version for years, based on .NET and XML – a switch to GEARS would be easy! No need for MSFT any more, good luck Bill
I doubt Google is going to buy Salesforce at this time. Sounds more like gossip
Interesting nevertheless!
This is just the beginning. There is going to be some great consolidation between companies you never thought could be under one umbrella. Don’t forget IBM….
@#2: I still love Google, but their “don’t be evil” credo fell by the wayside as soon as they implemented their partnership with Dell and started redirecting spelling mistakes in Web addresses and for sites that don’t resolve to an ad-filled page where irrelevant ads and “popular categories” take up the entire screen above the fold – on a 20″ monitor! To make matters worse, they do this by installation of a browser helper object they created for Dell called “Browser Address Error Redirector” to confuse less technically-inclined people into thinking, “it came with my PC, and it sounds innocuous and like it’s needed, I better not uninstall it,” to do their redirecting. We have a name for companies that install surreptitious software to intercept Web browsing with sponsored links: it’s called Claria. It’s called WhenU.
Do a search for “google+AFE” and you’ll see.
Cheers,
Doug
SugarCRM seems like a better fit. Open source, more users, better app, fraction of the cost. Salesforce is not much more than a talented sales force pushing glorified contact management.
The day Microsoft acquires Salesforce, Oracle will take our a full-page ad in the Wall Street Journal proclaiming “Microsoft CRM Applications are Powered by Oracle!”.
I strongly suspect that this will be a worse strategic partnership arrangement than the one SUN and GOOGLE announced a year or 2 ago.
Acquisition bait – I doubt it! CRM is overpriced at $5.5bn and a 20% or so acquisition premium will make it only more expensive. And for what? GOOG has been having more success than CRM in its office apps, and it will be cheaper for GOOG to build something similar rather than buy CRM.
SAP has also indicated that they will be focusing on the small business market very soon and Microsoft already has 4 Dynamics products – enough to confuse most corporate customers, without having one more.
The announcement is very likely to be something along the lines of Salesforce users will now have access to Google Office Apps.. Something they all did earlier.
CRM needs extra publicity to keep the stock price up (and you see a lot of fluff press releases being generated by them) and any hype is good for them.
From what we see as a Salesforce partner, Salesforce is executing incredibly well. Customers love the product in a way and for reasons that may be hard for non-power users to appreciate (customization is key). And customers are willing to pay handsomely for it. Salesforce is investing heavily to grow and expand the platform in unique ways (AppExchange really is unique). They will do $1billion in revenue next year. Selling now would seem odd timing.
Nice insight! Really enjoyed this article Mike.
SF just needs to get a better grip on the small business market, which is becoming more attractive to Google if nothing else b/c of its sheer numbers (or so my google contacts tell me, but they’re all low level developers so what do they know
). Small businesses, esp non-tech-savvy ones (and there are a LOT of those), are still often creeped out by SalesForce; so adding the thought of GoogleAds being able to reach into their [potential] client list scares many of them. The ability to reach out to wider potential customer base is attractive, but don’t discount the fear of Google going intrusively that [still] exists. That’s why Act!, Goldmine and Maximizer are still in the game for the millions of small businesses out there.
I recently asked a small audio visual shop why they didn’t go online for CRM and answer was more or less “it’s on my computer and I can control it.” Putting their client list online to be accessible & managed by someone else – still a big hurdle for many small entities.
And if Goooooogle (or anyone) wants to buy a killer desktop application that combines Act, Lyris & Outlook – i know a company willing to sell!
Isn’t it PAUL Chamberlain?
yep, it sure is. that was a bad typo. thank you.
Great analysis Mike, Salesforce is “a perfect fit” to Google. We’re gonna see lot of exciting software when they join their forces.
A lot of BS.
The reason why Google docs and spreadsheet hasn’t caught up yet is for security reasons, not for technical reasons. Why Google is not selling a corresponding intranet appliance for this is beyond me, hopefully that will happen in the not too distant future. Should it happen, there is a huge opportunity right now as Microsoft is killing their own Office customer base (the Office 2007 file formats are new and incompatible).
I disagree Stephane, I can’t get people to use google docs / spreadsheets for a number of reasons – security is not one of them. This is in a company that uses google apps for your domain, btw. Sales people can’t live without their powerpoint. Finance people can’t live without excel. And Word, well at least it works offline.
Cheers,
All i can say is that “well done” to the webmaster. Glad that you are not giving into Salesforce.com and their bully tactics asking for the info. This is supposed to be anonymous post after all.
Finally a person standing up to them
Well, that was about to happen. Thought I’m not that sure whether Google is really interested in the financial prospects of that deal – or rather in adding a CRM to their total suite in order to gain additional avertising data.
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