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Salesforce's expected Slack buy a 'shot across the bow' at Microsoft – analysts

With salesforce.com inc. widely expected to announce a combination with Slack Technologies Inc., analysts are bullish, noting such a deal could bolster both companies' competitive stance and spur a wave of consolidation in the workforce collaboration space.

Citing anonymous sources, CNBC recently said Salesforce's acquisition of Slack will likely be announced after-market Dec. 1, in conjunction with Salesforce's quarterly earnings report. The cloud-based software company's takeover of business communications platform Slack is expected to consist of a half-stock, half-cash deal and will price Slack at a premium to its current stock price, per the report.

As the COVID-19 pandemic continues to disrupt how businesses operate, analysts say a consummated deal between Salesforce and Slack would benefit both companies, strengthening Salesforce's workplace collaboration portfolio while enabling Slack to better compete against larger competitors amid the rapid shift to remote work.

Though Salesforce has made several large acquisitions in recent years including its $17.38 billion deal with data-visualization platform Tableau Software Inc. in 2019 and its $6.81 billion buy of open-source firm MuleSoft, Inc. in 2018 Slack could be its largest to date and among the software sector's biggest ever. Slack's market capitalization as of the morning of Dec. 1 was nearly $24.80 billion.

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Wedbush Securities analyst Daniel Ives in a Nov. 30 report called the deal a "major shot across the bow" at Microsoft and its Teams business collaboration platform and could pressure other tech companies to pursue similar acquisitions.

"This would competitively change the landscape and make Salesforce even that much more of a competitor ... [to Microsoft] in the field as these two stalwarts further compete in the trillion-dollar cloud opportunity over the next decade," Ives said. "Taking a step back, we believe the software landscape is ripe for major M&A and if Salesforce does head down this path [on Dec. 1] it would set off a chain reaction for more cloud software deals in 2021."

Over the past several months, many investors have placed their bets on tech stocks like Zoom Video Communications Inc. and Microsoft, whose virtual collaboration software has enabled many businesses and consumers to work and play from home with some degree of normalcy.

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Slack client for Windows
Source: Slack Technologies

Salesforce's expected acquisition of Slack indicates that both companies are betting that many pandemic-induced trends are here to stay, said Chris Marsh, a principal research analyst with 451 Research, a division of S&P Global Market Intelligence. He added that the deal will be a crucial next step for Salesforce to meet the growing demand among businesses for easy-to-use collaboration and messaging tools.

"Salesforce needed a way to connect and create workflows across its estate, across its sales and services and different parts of its environment, and again, Slack would be well suited to support that," Marsh said in an interview. "So in all of those angles — new agile ways of working, remote, internal/external, cross-functional collaboration — Salesforce needed a way to begin to speak to that growing demand. And Slack, I think, can help them with stuff like that."

However, some analysts hold a slightly more cautious view of the deal.

Evercore ISI analyst Kirk Materne notes that while the combination possesses some "strategic rationale," including providing Salesforce with a "more robust" collaboration toolkit and equipping Slack with Salesforce's enterprise sales knowledge and customer base, it still might not be enough to compete against the likes of Microsoft and other more-established players.

"The problem is even with Salesforce's heft in the enterprise market, competing with Microsoft Teams in its core market is going to be extremely difficult and convincing investors of the merits of this deal will be challenging," Materne wrote in a report. "Meaning this is not a deal that investors are going to give the acquirer the benefit of the doubt."

Deal talks between the two firms were first reported Nov. 25 by The Wall Street Journal, which cited people familiar with the matter. Slack shares soared by as much as 38% in intraday trading Nov. 25 following the Journal's report, and were trading around $43.12 on the morning of Dec. 1. Salesforce stock, meanwhile, tumbled 7% on Nov. 25 but has recovered slightly, hovering close to $246.08 in pre-market trading Dec. 1.

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